1. Quartal 2006
First Quarter Report
For the three months ended
March 31, 2006
Verenex Energy Inc. (“Verenex” or the “Company”) (TSX – VNX) is pleased to report its unaudited interim
operating and financial results for the three months ended March 31, 2006.
Verenex is a Canada-based international exploration and production company with a world-class
exploration portfolio in the Ghadames Basin in Libya and in the Bay of Biscay offshore France.
Highlights
Financial
¾ Cash flow from operations in the first quarter of 2006 was $0.9 million reflecting revenues from a full
quarter of oil production in France.
¾ The Company’s working capital surplus at March 31, 2006 was $28.8 million. This excludes restricted
cash of $6.8 million associated with financial instruments, entered into on behalf of Verenex and its
partner Medco International Ventures Limited, to back-stop early termination provisions under drilling
rig contracts for Libya.
Operations - Libya
¾ In April 2006, the Company executed contracts for two drilling rigs for its operations in Area 47 in
Libya. Both contracts include an initial two-year term, with two one-year extension options exercisable
by the Company. Maximum early termination exposure under the two contracts in aggregate is $7.2
million (net Verenex).
¾ The first drilling rig is expected to arrive in Libya in the third quarter of 2006 and the second rig in the
first quarter of 2007. The Company is targeting to spud its first well in Area 47 late in the third quarter
of 2006.
¾ The initial 243 square kilometer 3-D seismic shoot in the southern part of Area 47 was completed in
March 2006. Full interpretation of the results should be available in mid-May to support well approval
applications to the Libyan National Oil Corporation (“NOC”) for the first two to three wells planned in
2006 and 2007 in this area.
¾ The first two shipments of casing and tubing were received in Libya in April 2006. Remaining
deliveries of casing and tubing and other drilling supplies to equip four wells have been scheduled for
May and June well in advance of drilling.
¾ Bids were received in late April 2006 for a service rig to carry out a planned re-entry, workover and
production test on a suspended oil discovery well and to complete and test new drilled wells. The
Company is targeting to award a term contract for a service rig in May to commence the re-entry and
workover in the third quarter of 2006.
1
Verenex Energy Inc. First Quarter Report – March 31, 2006
¾ A revised 2006 work program and budget for Libya is being developed for review by the Area 47
Management Committee in late May 2006. The Company is projecting 2006 expenditures in Libya of
approximately Cdn $26 million, down from Cdn $29 million in the original budget, reflecting deferral of
two of the four planned wells in 2006 partially offset by the potential addition of a second re-entry and
workover (contingent on partner and NOC approvals), casing and tubing inventory and other
anticipated cost increases based on contract bid costs.
¾ The Company has hired an additional four full-time staff for its Tripoli office which increases the
complement to twelve.
France
¾ Oil production from two wells in France in the first quarter of 2006 averaged 130 barrels per day.
¾ The Company has withdrawn its application to the French government to extend the onshore Les
Trois Lagunes exploration permit (95% Verenex participating interest) into a second term. The first
term of the permit expired in July 2005. The Company was unable to identify sufficiently strong
exploration leads to warrant a one well commitment to extend the permit term.
¾ Discussions are continuing with the French government to advance the application for exploration
rights in the offshore Aquila permit (50% Verenex participating interest), which is adjacent to the
Aquitaine Maritime exploration permit. A competing application was lodged for this permit which has
extended the deliberations.
¾ Interpretation of the new 3-D and 2-D seismic on the Aquitaine Maritime exploration permit (50%
Verenex participating interest) is nearing completion to support discussions in May 2006 with
potential partners to take on the drilling portion of the exploration program. The target is to drill one or
two wells in the second half of 2007 subject to an acceptable farm-out and drilling rig availability.
2
Verenex Energy Inc. First Quarter Report – March 31, 2006
Highlights
Three Months Ended Three Months Ended
(unaudited) March 31, 2006 March 31, 2005
Financial (thousands of Cdn $, except share and per share amounts)
Petroleum and natural gas revenues (net)
Cash flow from operations
Net loss
Capital expenditures
Working capital surplus
Common shares outstanding
Basic
Diluted
Weighted average common shares outstanding
Basic
Diluted
Share trading
High
Low$ 1,191
935
(278)
2,629
28,751
30,903,391
32,255,891
30,834,140
32,184,565
4.30
3.00
$ 367
184
(1,788)
2,476
16,386
22,559,600
26,353,350
22,559,600
23,500,091
$ 7.25
$ 3.30
Close 4.20 $ 5.75
Operations
Production
Crude oil (bbls/d)
Natural gas liquids (bbls/d)
Natural gas (mcf/d)
Boe/d (6:1) *
Average reference price
WTI (US per bbl)
Brent (US per bbl)
AECO (Cdn per mcf)
Average selling price
Crude oil (Cdn per bbl)
Natural gas liquids (Cdn per bbl)
Natural gas (Cdn per mcf)
$
$
130
22
356
211
63.47
61.75
7.55
75.13
46.14
7.13
$
$
-
33
518
120
49.85
47.49
6.89
-
35.96
5.56
Operating Netback (per BOE at 6:1) $ 54.75 $ 48.80
The above table includes non-GAAP measures, which may not be comparable to other companies. See
MD&A for further discussion.
Capital Expenditures (Cdn $)
During the first quarter of 2006, the Company invested $2.6 million. Libya accounted for the majority of
the activity level with approximately $1.3 million invested in casing, tubing and wellhead equipment, $0.6
million in the initial 3-D seismic program completed in March, and $0.3 in capitalized General and
Administration (“G&A”) and office set up costs. In France, $0.2 million was invested in the Aquitaine
Maritime offshore seismic program. In Canada, a further $0.2 million was spent on office equipment and
capitalized G&A related to New Ventures activities.
3
Verenex Energy Inc. First Quarter Report – March 31, 2006
Outlook
Libya
The initial 243 square kilometer 3-D seismic shoot in the southern part of Area 47 was completed by the
Arab Geophysical Exploration Services Company (“AGESCO”) in mid-March 2006 using their AG03 crew.
This area encompasses two existing oil discoveries at the suspended B1-70 and A1-NC3A wells and at
least two or three exploration wells planned in 2006 and 2007. The full interpretation of the 3-D survey is
expected to be available in mid-May 2006. This program satisfies the 3-D component of the minimum
commitment program under the Exploration and Production Sharing Agreement (“EPSA”) for Area 47.
An AGESCO crew is expected to start the acquisition of a 960 kilometre 2-D seismic survey in June 2006
in the southern part of Area 47. This survey area surrounds the 3-D survey area and includes an
expansion to the east to include a number of new leads identified towards the eastern boundary of Area
47. This prospective area is on trend with and between the Area 47 discoveries at B1-70 and A1-NC3A
and two recently reported oil and gas discoveries drilled on 3-D seismic by AGOCO (an NOC affiliate)
near the Tlacsin field approximately 12 kilometres east and up-dip of Area 47. AGOCO is currently
running another 3-D seismic survey in this area.
After completion of the southern 2-D survey in late August, the AG02 crew will carry out the planned 700
kilometre 2-D survey in the north and the 237 square kiolmetre 3-D survey in the central part of Area 47.
The entire program is expected to be completed by late December 2006 and will fulfill all of the 3-D and
2-D seismic requirements under the EPSA for Area 47.
In April 2006, the Company’s wholly owned subsidiary Verenex Energy Area 47 Libya Limited executed
contracts for two drilling rigs for its operations in Area 47 in Libya. The contract awards were approved by
the Area 47 Management Committee (“Area 47 MC”), which includes representatives from Verenex,
partner Medco International Ventures Limited and the Libyan National Oil Corporation (“NOC”).
The first rig, contracted with Oil Drilling & Exploration (Borneo) Pty Limited (“ODE”), a subsidiary of
Ensign Energy Services Inc. based in Calgary, Alberta, is expected to be available to spud the
Company’s first well late in the third quarter of 2006. ODE has been contract drilling in Libya for more
than 28 years. The rig will be shipped from New Zealand where it recently completed drilling operations.
The second rig, contracted with KCA DEUTAG Drilling GmbH (“KCA DEUTAG”) based in Germany, is
expected to be delivered in the first quarter of 2007. KCA DEUTAG has been drilling in Libya for more
than 36 years. The rig is essentially a new-build and will be constructed in Dubai.
Under the contract terms for these drilling rigs, the Company retains the ability to assign the rigs to third
parties, with the approval of the contractor, if circumstances warrant. In this regard, the Company will be
monitoring the progress on deliveries of both rigs to Libya, the progress on well location approvals from
the NOC and the results of the initial wells to be drilled by the ODE rig in order to determine the optimum
spud date for the KCA DEUTAG rig in 2007 that enables the capture of learning curve benefits.
A contract was awarded in April 2006 for an initial four fresh water wells to support the drilling and
workover program in Area 47. The first re-entry and workover of a suspended water well near the A1NC3A oil discovery well commenced in April. This water well had previously been utilized in 1998 to
support the drilling of the A1-NC3A well.
The first two shipments of casing and tubing from the Netherlands and Dubai were received in Libya in
April 2006. The remaining shipments of casing, tubing, wellheads and other supplies from Houston,
Edmonton and the Netherlands are scheduled for May and June 2006 to equip the initial four wells in the
planned drilling program.
A contract was awarded for drilling cementing services in April 2006. A contract award proposal for drilling
fluids is currently being reviewed by the Area 47 MC.
4
Verenex Energy Inc. First Quarter Report – March 31, 2006
Work was completed in April 2006 on the mechanical design of the well completions and the full suite of
well tests for the planned re-entry and workover on the suspended A1-NC3A well and for new exploration
wells. Bids were also received in late April from three contractors for a service rig to carry out this
program. The Company is targeting to award the service rig contract in May 2006 to commence the reentry and workover in the third quarter of 2006.
A revised 2006 work program and budget for Libya is being developed for review by the Area 47
Management Committee in late May 2006. The Company is projecting 2006 expenditures in Libya of
approximately Cdn $26 million, down from Cdn $29 million in the original budget, reflecting deferral of two
of the four planned wells in 2006 partially offset by the potential addition of a re-entry and workover on the
G1-NC02 oil discovery well (contingent on partner and NOC approvals), casing and tubing inventory and
other anticipated cost increases based on contract bid costs.
The Company has hired an additional four full-time staff for its Tripoli office which increases the
complement to twelve. The new hires include a secondee from Medco for the position of Geology and
Geophysics Operations Manager and an experienced expatriate for the position of Procurement and
Logistics Coordinator. The Company is targeting to double the size of full-time in-country organization by
the third quarter of 2006 and to supplement this with additional drilling and completions contract staff in
advance of drilling.
France
Discussions are continuing with the French government to advance the application submitted by
Vermilion REP SAS in December 2004 for exploration rights in the offshore Aquila permit (50% Verenex
participating interest). This permit area is adjacent to the Aquitaine Maritime exploration permit. A
competing application was lodged for this permit which has extended the deliberations.
Interpretation of the new 3-D and 2-D seismic on the Aquitaine Maritime exploration permit (50% Verenex
participating interest) is nearing completion to support discussions in May 2006 with potential partners to
take on the drilling portion of the exploration program. The target is to drill one or two wells in the second
half of 2007 subject to an acceptable farm-out and drilling rig availability.
Verenex's annual and special meeting of shareholders is scheduled to be held at 10 am this morning in
the Strand Tivoli Room of the Metropolitan Centre at 333 - 4th Avenue S.W., Calgary. A copy of the
presentation to be delivered to shareholders will be posted on the Company's website at
www.verenexenergy.com on May 3, 2006.
This press release contains forward-looking statements, including but not limited to operational
information including earnings, cash flow, production and capital investment projections. These
projections are based on current expectations and are subject to a number of risks and uncertainties that
could materially affect the results. These risks include, but are not limited to, risks associated with the oil
and gas industry (e.g. 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
estimates and projections in relation to production, costs and expenses and health, safety and
environmental risks), drilling equipment availability, the ability to attract and retain key personnel, the risk
of commodity price and foreign exchange rate fluctuations, the uncertainty associated with negotiating
with foreign governments and risk associated with international activity. 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.
Jim McFarland, P.Eng.
President & Chief Executive Officer
May 3, 2006
5
Verenex Energy Inc. First Quarter Report – March 31, 2006
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following is management’s discussion and analysis (MD&A), dated May 3, 2006, of the Company’s
operating and financial results for the three months ended March 31, 2006. The financial data has been
prepared in Canadian dollars in accordance with Canadian Generally Accepted Accounting Principles
applied consistently with prior periods. This discussion should be read in conjunction with the Company’s
interim unaudited consolidated financial statements for the periods ended March 31, 2006 and 2005 and
the audited consolidated financial statements for the period ended December 31, 2005, together with the
accompanying notes as contained in the Company’s 2005 Annual Report.
Additional information relating to the Company, including its Annual Information Return, NI 51-101
disclosure and details of outstanding share data and the Company’s Stock Option Plan, is available on
SEDAR at www.sedar.com.
Forward-Looking Information
This report contains forward-looking financial and operational information, including but not limited to
operational information including earnings, cash flow, production and capital investment projections.
These projections are based on current expectations and are subject to a number of risks and
uncertainties that could materially affect the results. These risks include, but are not limited to, risks
associated with the oil and gas industry (e.g. 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 estimates and projections in relation to production, costs and expenses
and health, safety and environmental risks), drilling equipment availability, the ability to attract and retain
key personnel, the risk of commodity price and foreign exchange rate fluctuations, the uncertainty
associated with negotiating with foreign governments and risk associated with international activity. 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.
Non-GAAP Measures
Included in this report are references to terms commonly used in the oil and gas industry, such as cash
flow and cash flow per share which is expressed before changes in non-cash working capital and are
used by the Company to analyze operating performance, leverage and liquidity. These terms are not
defined by Generally Accepted Accounting Principles (“GAAP”). Consequently, these are referred to as
non-GAAP measures.
Operating Results
Asset Valuation
The Company performs a review for asset impairment as required by the Full Cost Accounting Guideline,
AcG-16. Any impairment in value is dependent upon an independent reservoir engineer’s assessment of
the deliverability and reserves associated with certain wells and the outlook for world prices for oil and
natural gas.
Revenues
Oil and gas production increased by 176% to 211 barrels of oil equivalent per day (“boepd”) in the first
quarter of 2006 resulting in oil and gas revenues of $1.2 million, net of royalties, compared to 120 boepd
and revenues of $0.4 million in the first quarter of 2005 and 195 boepd and $1.2 million in revenues for
the fourth quarter ended December 31, 2005. This increase in the first quarter of 2006 is primarily a result
of an additional 130 barrels of oil per day of production from the France wells. In the first quarter of 2005,
test oil production from France of approximately 12 barrels per day was excluded from operating results,
the proceeds of which had been offset against cumulative well costs. During the fourth quarter of 2005,
6
Verenex Energy Inc. First Quarter Report – March 31, 2006
the Company determined that both the St. Lazare 2H and the Parentis 222H wells were commercial on a
go forward basis and the associated revenues and expenses were therefore included in the Company’s
operating results.
During the first quarter of 2006 the Bottrel GORR provided production of approximately 81 boepd and
revenues of $0.3 million versus 120 boepd and $0.4 million for the same period in 2005 and 67 boepd
and $0.4 million of royalty income during the fourth quarter of 2005. The results three months ended
March 31, 2006 and March 31, 2005 were impacted by production allocation volume adjustment
increases of approximately 5 boepd and 26 boepd, respectively, from the gross overriding royalty at
Bottrel, Alberta (the “Bottrel GORR”). There were no other unusual cyclical or seasonal factors impacting
the Company’s production.
Average realized prices for the first quarter of 2006 were: oil $75.13 per bbl (2005 – n/a); natural gas
$7.13 per mcf (2005 - $5.56); and NGL $46.14 per bbl (2005 -$35.96). These compare to prices of
$64.97 per bbl for oil, $12.98 per mcf for natural gas and $79.40 per bbl for NGL during the fourth quarter
ended December 31, 2005.
Interest of $0.3 million was earned in the first quarter of 2006 (2005 - $0.2 million) and $0.1 million for the
fourth quarter of 2005 on cash balances invested in excess of expenditure requirements. The increase is
due to the increased cash balance resulting from the December 2005 financing of approximately $24.7
million (net of issue costs).
Stock Compensation
For the quarter ended March 31, 2006, non-cash stock compensation expense related to stock options,
Stock Appreciation Rights (“SAR’s”) and performance warrants was $0.6 million (2005 - $2.0 million)
compared to $0.4 million in the fourth quarter of 2005. The increase in costs compared to the fourth
quarter of 2005 relates to the fact that the number of stock options and performance warrants outstanding
has increased and recognition of the cost of the SAR’s during the first quarter of 2006 when the stock
price closed above the exercise price of $3.24.
The Company has adopted the fair value method of accounting for stock options and performance
warrants. With respect to the performance warrants, the vesting conditions relating to the weighted
average trading price of $3.75 and $4.25 were satisfied during the first quarter of 2005. As a result, the
vesting period over which the costs were amortized was shortened to reflect the fact that only the timing
conditions remain and a non-cash charge in the amount of $1.8 million was taken in the first quarter of
2005 to reflect the acceleration of the vesting period.
General and Administration (“G&A”)
G&A costs, net of amounts capitalized to ongoing investment programs, of $0.4 million were incurred
during the first quarter of 2006 compared to $0.4 million in the fourth quarter of 2005 and $0.3 million in
the first quarter of 2005. The net amounts represent salaries, employee benefits, office costs, legal and
related party services not directly attributable to ongoing exploration and development capital projects.
Effects of Exchange Rate Fluctuations
The Company’s operations are conducted primarily in jurisdictions where the United States dollar (US$)
and the European Euro (€) are the business currencies. A large proportion of the Company’s costs,
assets and liabilities during the quarter ended March 31, 2006 were denominated in US$. As the
Canadian dollar fluctuates during the period, foreign exchange gains and losses are reflected in both the
earnings and cash flow amounts.
7
Verenex Energy Inc. First Quarter Report – March 31, 2006
Depletion and Depreciation
Depletion and depreciation for the three months ended March 31, 2006 was $0.7 million (2005 - $0.2
million), which relates to the depletion of the France and Canadian assets. This compares to $1.1 million
for the fourth quarter of 2005, excluding the $7.5 million impairment provision at December 31, 2005.
Depletion of the France producing properties commenced effective October 1, 2005 and in December
2005 an impairment provision of $7.5 million was made against the France properties, which reduced the
depletion rate on a prospective basis.
Due to Related Party
Amounts due to related parties at March 31, 2006 are comprised of an amount due to Vermilion REP
SAS (“VREP”) of $0.8 million Canadian equivalent (€0.5 million), relating to amounts incurred on the
Company’s behalf in France, net of $0.2 million due to Verenex relating to Bottrel GORR income not yet
received. All intercompany amounts relate to current activities and will be repaid in the normal course of
business. The balance has declined from $1.9 million Canadian equivalent (€0.9 million) at December 31,
2005 as a result of payments made to date.
Verenex entered into a Technical and Administrative Services Agreement with Vermilion Resources
Limited (“Vermilion”) on June 28, 2004, whereby Vermilion provides certain financial and administrative
services at a cost of twenty thousand dollars per month and certain technical, marketing and other
services at cost plus 5%, for a period of eighteen months ending December 31, 2005. The Agreement is
automatically renewed for one-year periods, unless one party provides three months notice not to renew.
Effective January 1, 2006, the monthly charge was amended to eliminate the services provided for the
Canadian financial and administrative services, reducing the monthly charge to ten thousand dollars per
month in support of the France operations. During the three months ending March 31, 2006 Verenex was
billed thirty thousand dollars (2005 – sixty thousand) for services provided under this Agreement.
Liquidity and Capital Resources
Verenex will continue to rely primarily on equity to fund future working capital requirements and capital
obligations.
The Company has issued two letters of credit (“LC’s”) relating to the signing of two long-term drilling
contracts that back-stop early termination provisions. The terms of the contract call for the LC’s to vary
over the period of the contract. The first LC expires on November 13, 2008 and is exercisable by Oil
Drilling & Exploration (Borneo) Pty Limited (“ODE”), a subsidiary of Ensign Energy Services Inc. based in
Calgary, Alberta. The ODE contract required that cash collateral of US $2.5 million (gross) to be put in
place initially. The second LC in favour of KCA DEUTAG Drilling GmbH based in Germany (“KCA
DEUTAG”), expires on April 30, 2009 and is supported by initial cash collateral of US $3.3 million (gross).
The LC’s have provisions to increase these amounts to a maximum of US$ 12.0 million (gross) in
aggregate at the projected spud dates, after which the LC amounts decline as the rigs are worked. The
Company has received funds from its partner, Medco International Ventures Limited, for its 50% share of
the cash collateral and all cash provided as support for the LC’s have been reflected as restricted cash on
the balance sheet.
The Company had a working capital surplus of $28.8 million at March 31, 2006 compared to $33.7
million as at December 31, 2005, including cash and term deposits amounting to $34.7 million (December
31, 2005 - $35.5 million) net of restricted cash amounting to $6.8 million (December 31, 2005 – nil). The
decrease in working capital is due to the increasing activities in the Company’s Libya operations including
the funding of cash balance required to support the LC’s.
The majority of the trade receivables relate to amounts associated with the joint venture operations in
France and Libya and an accrual for revenues associated with the Bottrel GORR. All trade receivables
have been assessed for credit risk and no allowance for doubtful accounts is necessary at this time.
8
Verenex Energy Inc. First Quarter Report – March 31, 2006
Accounts payable and accrued liabilities have increased since December 31, 2005 due to the increased
activity levels in Libya as the Company commenced its seismic operations and entered into contracts to
purchase casing, tubing and well head equipment.
The Company has sufficient resources to fulfill its short-term work program commitments.
Verenex is listed on the Toronto Stock Exchange under the stock symbol VNX. In December, 2005 the
Company successfully completed an equity financing issuing 8,162,500 common shares for gross
proceeds of $26.1 million, net $24.7 million after issue costs.
Critical Accounting Estimates
The amounts recorded for depletion and depreciation of property, plant and equipment are based on
estimates. By their nature, these estimates are subject to measurement uncertainty and the effect on the
consolidated financial statements from changes in such estimates in future years could be significant.
The Company performs a review for asset impairment as required by the Full Cost Accounting Guideline,
AcG-16. Any impairment in value is dependent upon an independent reservoir engineer’s assessment of
the deliverability and reserves associated with certain wells and the outlook for world prices for oil and
natural gas.
9
Verenex Energy Inc. First Quarter Report – March 31, 2006
Verenex Energy Inc.
Consolidated Balance Sheets
(thousands of Cdn $)
unaudited
March 31, December 31,
2006 2005
Assets
Current assets
Cash and cash equivalents $ 34,749 $ 35,546
Accounts receivable 269 711
Inventory 103 74
Prepaid expenses and other 65 13
35,186 36,344
Restricted cash (Note 10) 6,774 -
Capital assets (Note 2) 20,254 18,277
$ 62,214 $ 54,621
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable and accrued liabilities $ 3,755 $ 946
Joint venture payables 2,095
Due to related party (Note 3) 579 1,660
Taxes payable 6 73
6,435 2,679
Joint venture payables related to restricted cash (Note 10) 3,387 -
Asset retirement obligations 34 37
9,856 2,716
Commitments and Contingencies (Note 9)
Shareholders’ equity
Share capital (Note 4) 60,831 60,560
Contributed surplus (Note 4) 4,052 3,592
Deficit (12,525) (12,247)
52,358 51,905
$ 62,214 $ 54,621
See accompanying notes to the Consolidated Financial Statements
Approved by the Board of Directors
10
Verenex Energy Inc. First Quarter Report – March 31, 2006
Verenex Energy Inc.
Consolidated Statements of Loss and Deficit
(thousands of Cdn $, except share and per share amounts)
unaudited
Three months ended Three months ended
March 31, 2006 March 31, 2005
Revenue
Petroleum & natural gas, net $ 1,191 $ 367
Interest income 270 161
1,461 528
Expenses
Production 85 -
Transportation 31 -
General and administration 391 332
Stock based compensation (Note 5) 555 2,024
Depletion and depreciation (Note 2) 652 191
Foreign exchange (gain)/loss6 (243)
1,720 867
Loss before taxes (259) (1,776)
Capital taxes 19 12
Net loss (278) (1,788)
Deficit, beginning of period (12,247) (1,110)
Deficit, end of period $ (12,525) $ (2,898)
Net loss per share basic
and diluted (Note 6) $ (0.01) $ (0.08)
Weighted average number
of shares outstanding (Note 6):
Basic 30,834,140 22,559,600
Diluted 32,184,565 23,500,091
See accompanying notes to the Consolidated Financial Statements
11
Verenex Energy Inc. First Quarter Report – March 31, 2006
Verenex Energy Inc.
Consolidated Statements of Cash Flows
(thousands of Cdn $)
unaudited
Three months ended Three months ended
March 31, 2006 March 31, 2005
Cash and cash equivalents provided by (used
in):
Operating activities:
Net loss $ (278) $ (1,788)
Items not affecting cash:
Stock based compensation555 2,024
Depletion and depreciation 652 191
Unrealized foreign exchange (gain)/loss 6 (243)
Cash flow from operations before changes in
non-cash working capital 935 184
Changes in non-cash operating
working capital 270 (235)
1,205 (51)
Investing activities:
Acquisition and expenditures on petroleum
and natural gas properties (2,629) (2,476)
Changes in non-cash investing working
capital 5,004 38
2,375 (2,438)
Financing activities:
Issue of common shares for cash, net of
share issue costs 176 153
Restricted cash movements (6,774)
Joint venture payables related to restricted
cash movements 3,387
Payments to related party (Notes 3) (1,047) (853)
(4,258) (700)
Foreign exchange gain on cash held in a foreign
currency (119) (62)
Net change in cash and cash equivalents (797) (3,251)
Cash and cash equivalents, beginning of period 35,546 27,237
Cash and cash equivalents, end of period $ 34,749 $ 23,986
Cash taxes paid 84 -
Cash interest received 270
161
See accompanying notes to the Consolidated Financial Statements
12
Verenex Energy Inc. First Quarter Report – March 31, 2006
Verenex Energy Inc.
Notes to the Consolidated Financial Statements
For the three months ended March 31, 2006
(thousands of Cdn $, except as noted)
unaudited
1. Summary of Significant Accounting Policies and Basis of Presentation
The interim consolidated financial statements have been prepared by management in accordance
with Canadian Generally Accepted Accounting Principles on a consistent basis with the audited
consolidated financial statements for the period ended December 31, 2005. Certain disclosures in
the interim financial statements may not conform in all respects to the requirements of generally
accepted accounting principles for annual financial statements. The interim consolidated financial
statements should be read in conjunction with the consolidated financial statements as at and for
the period ended December 31, 2005.
2. Capital Assets
Petroleum and natural gas properties and equipment
Furniture and equipment
Cost
$29,802
401
March 31, 2006
Accumulated
Depletion,
Depreciation &
Amortization
$9,866
83
Net
Book
Value
$19,936
318
$30,203 $9,949 $20,254
December 31, 2005
Accumulated
Depletion, Net
Depreciation & Book
Cost Amortization Value
Petroleum and natural gas properties and equipment $27,242 $9,244 $17,998
Furniture and equipment 332 53 279
$27,574 $9,297 $18,277
The Company capitalized $0.4 million of general and administrative costs relating to exploration
and development activities for the three months ended March 31, 2006 (March 31, 2005 - $0.2
million).
The Company has included $1.3 million in pre-drilling costs in Libya during the first quarter 2006
(2005 - $nil) relating to casing, tubing and wellhead equipment.
In France for 2005, the net proceeds from test oil production from the Parentis 222H and St.
Lazare 2H wells totaling $0.03 million for the three months ended March 31, 2005 were offset
against the cumulative well costs. During the fourth quarter of 2005, the Company determined
that both the St. Lazare 2H and the Parentis 222H wells were commercial on a go forward basis
and the associated revenues and expenses were included in the Company’s operating results
effective from October 1, 2005.
Depletion and depreciation of $0.7 million for the three months ended March 31, 2006 (2005 -
$0.2 million) relates to the depletion of the France and Canadian assets. The 2005 depletion
expense related entirely to the Bottrel GORR production. Approximately, $6.0 million in
undeveloped land (2005 - $16.0 million) in France and $3.1 million in Libya (2005 - $nil) was
excluded from the depletion calculation.
13
Verenex Energy Inc. First Quarter Report – March 31, 2006
3. Related Party Transactions
Vermilion REP SAS (“VREP”) is a 100% owned subsidiary of Vermilion Energy Trust, which is a
significant shareholder in Verenex. VREP, as contract operator in France, paid for various
expenditures on behalf of Verenex. These transactions were measured at the exchange amount
being the consideration established and agreed to by the related parties. These transactions
were undertaken under the same terms and conditions as transactions with non-related parties.
Amounts due to related parties are comprised of an amount due to VREP of $0.8 million
Canadian equivalent (€0.5 million), (December 31, 2005 – Canadian equivalent $1.9 million (€1.4
million)) relating to amounts incurred on the Company’s behalf in France, net of $0.2 million
(December 31, 2005 - $0.5 million) due to Verenex relating to Bottrel royalty income not yet
received.
The Bottrel GORR provided $0.3 million of royalty income during the three months ended March
31, 2006 (2005 – $0.4 million).
Verenex entered into a Technical and Administrative Services Agreement with Vermilion
Resources Limited (“Vermilion”) on June 28, 2004, whereby Vermilion provides certain financial
and administrative services at a cost of twenty thousand dollars per month and certain technical,
marketing and other services at cost plus 5%, for a period of eighteen months ending December
31, 2005. The Agreement is automatically renewed for one-year periods, unless one party
provides three months notice not to renew. Effective January 1, 2006, the monthly charge was
amended to eliminate the services provided for the Canadian financial and administrative
services, reducing the monthly charge to ten thousand dollars per month in support of the France
operations. During the three months ending March 31, 2006 Verenex was billed thirty thousand
dollars (2005 – sixty thousand dollars) for services provided under this Agreement.
4. Share Capital
Authorized
Unlimited number of common shares
Unlimited number of preferred shares
Number
Issued of Shares Amount
Opening balance as at January 1, 2006 30,830,433 $60,560
Issued for cash on warrant and option exercise 72,958 186
Share issue costs (10)
Transferred from contributed surplus on warrant and option
exercise 95
Balance as at March 31, 2006 30,903,391 $60,831
14
Verenex Energy Inc. First Quarter Report – March 31, 2006
4. Share Capital (continued)
Contributed Surplus
March 31, December 31,
2006 2005
Opening balance $ 3,592 $ 471
Stock compensation expense 618 3,264
Reversed on cancellation of unvested options (37) -
Reversed on cancellation of warrants (26) -
Transferred to share capital on warrant and option exercise (95) (143)
Ending balance $ 4,052 $3,592
5. Stock Compensation Plan
a) The Company has a stock option plan that allows the directors, officers and employees of the
Company to be granted rights to acquire common shares of the Company. Shareholders
approved an amendment to the Company’s Stock Option Plan (the “Plan”) at the Company’s
Annual General Meeting on May 4, 2005. Under the amendment, the Company adopted a
“rolling” stock option plan that reserves a maximum of 10% of the aggregate number of
issued and outstanding common shares. The Plan previously in place reserved a fixed
number of common shares. The terms of the amended Plan are otherwise unchanged.
Stock option exercise prices are equal to the market price for the common shares on the date
immediately prior to the date the stock option is granted.
Stock options granted in any period vest over three years and expire five years after the
grant date. There were 90,000 options granted during the first quarter of 2006 at an average
exercise price of $3.80. The fair value per option of $1.852 was determined using the Black-
Scholes option-pricing model based on the assumptions noted below.
The following table summarizes information about the stock option plan:
For the three months Ended
March 31, 2006
Number of Weighted
Stock Average
Options Exercise Price
Opening balance, January 1, 2006 2,587,000 $2.99
Granted 90,000 3.80
Exercised (53,333) 2.55
Cancelled (178,667) 2.95
Closing balance, March 31, 2006 2,445,000 $3.04
b) The Company has also issued performance warrants. One-half of the performance warrants
become exercisable if the holder continues in their capacity with the Company until April 15,
2005 and if at any time during the term, the one-month weighted average trading price of the
shares is equal to or greater than $3.75 per share. One-half will also be exercisable if the
one-month weighted average trading price of the shares is equal to or greater than $4.25 per
15
Verenex Energy Inc. First Quarter Report – March 31, 2006
5. Stock Compensation Plan (continued)
share and the holder continues in their capacity until April 15, 2006. The performance
warrants expire at the close of business on June 28, 2011.
The performance warrant vesting conditions relating to the weighted average trading price of
$3.75 and $4.25 were satisfied in the first quarter of 2005. As a result, the vesting period over
which the compensation costs were amortized was reduced and a non-cash expense in the
amount of $1.8 million was recognized in the first quarter of 2005 to reflect the acceleration in
the vesting period.
The following table summarizes information about the performance warrants:
For the three months Ended
March 31, 2006
Number of Weighted
Performance Average
Warrants Exercise Price
Opening balance, January 1, 2006 1,946,750 $2.55
Exercised (19,625) 2.55
Cancelled (19,625) 2.55
Closing balance, March 31, 2006 1,907,500 $2.55
For the three months ended March 31, 2006, non-cash stock compensation expense related to
stock options and performance warrants was $0.5 million (March 31, 2005 – $2.0 million).
The fair value of the options and performance warrants is determined using the Black-Scholes
option-pricing model that takes into account, as of the grant date: exercise price, expected life,
current price, expected volatility, expected dividends, and risk-free interest rates.
The assumptions used in the computation of the fair value of the stock options and performance
warrants for 2006, 2005 and 2004 are as follows:
Stock Performance
Options Warrants
Risk free interest rate 4.5% 4.5%
Expected dividends nil nil
Expected life 5 years 7 years
Volatility 50% 50%
The remaining weighted average contractual life of the stock options and performance warrants is
3.7 years and 5.3 years respectively.
c) During the fourth quarter of 2005 410,000 share appreciation rights were granted to
employees at an exercise price of $3.24. Each right entitles the participant to receive from the
Company an amount equal to the positive difference, if any, obtained by subtracting the
assigned amount from the closing trading price of the common shares on the Toronto Stock
Exchange. The share appreciation rights vest over three years. As at March 31, 2006, the
trading price of the Company’s stock on the Toronto Stock Exchange was $4.20. Therefore
$0.1 million in costs have been recognized (2005 - $nil).
16
Verenex Energy Inc. First Quarter Report – March 31, 2006
6. Per Share Amounts
For the Three For the Three
Months Ended Months Ended
March 31, March 31,
2006 2005
Weighted average number
of common shares
outstanding 30,834,140 22,559,600
Shares issuable pursuant
to stock options 651,842 940,491
Shares issuable pursuant
to performance warrants 698,583 -
Weighted average number
of diluted common shares
outstanding 32,184,565 23,500,091
The weighted average diluted shares outstanding include all stock options in the money from the
date of grant or the beginning of the period. The weighted average diluted shares include the
performance warrants which are treated as contingently issuable shares and are included from
the beginning of the period that all of the conditions for issue were satisfied.
7. Segmented Information
The Company operates is three different geographical locations and has chosen to disclose key
financial data based on those jurisdictions. Where not specifically identified, income statement
line items, such as interest revenue, relate to Canada. Any allocations of costs between
segments are done at cost and based on time allocated to the various projects.
For the Three For the Three
Months Ended Months Ended
March 31, 2006 March 31, 2005
Petroleum & natural
gas revenues, net:
Canada 320 367
France 871 -
$ 1,191 $ 367
Net earnings (loss):
Canada (586) (1,964)
France 308 176
Libya --
$ (278) $ (1,788)
Cash flow generated
from operations:
Canada 190 251
France 745 (67)
Libya --
$ 935 $ 184
Capital expenditures:
Canada 188 234
France 186 1,793
Libya 2,255 449
$ 2,629 $ 2,476
17
Verenex Energy Inc. First Quarter Report – March 31, 2006
March 31, 2006 December 31, 2005
Identifiable assets:
Canada $ 41,990 $ 38,406
France 13,000 13,804
Libya 7,224 2,411
$ 62,214 $ 54,621
8. Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities and the amount due to related party approximated their fair values as at
December 31, 2005 as a result of the short-term nature of these instruments.
The oil and gas industry is subject to risks including fluctuations in foreign exchange rates and
commodity prices. The Company’s operating results and financial condition will be dependent on
the prices it receives for oil and natural gas production. Oil and natural gas prices have fluctuated
during recent years and are determined by supply and demand factors, including weather and
general economic conditions as well as conditions in other oil and natural gas regions. While
Verenex manages its operations in order to minimize exposure to these risks, the Company has
not entered into any derivatives or contracts to hedge or otherwise mitigate these fluctuations.
9. Commitments and Contingencies
Payments Due by Period
Less than
Contractual Obligations Total 1 Year 1 to 3 Years 4 to 5 years
Operating Leases $ 2,112 $ 532 $ 1,048
Work Program Commitments:
Libya 11,000 6,100 -$ 4,900
France 150 150 --
11,150 6,250 -4,900
Total Contractual Obligations $ 13,262 $ 6,782 $ 1,048 $ 5,432
Office leases
Effective May 1 2005, Verenex Energy Area 47 Libya Limited, a 100% owned subsidiary, entered
into a two-year contract to sublease office space in Tripoli, Libya at a cost of approximately three
thousand, seven hundred and fifty dollars per month payable annually in advance. The Company
has the option to extend the term of the lease by up to 3 years under the same terms. Effective
November 1, 2005 additional office space was subleased in Tripoli at a cost of one thousand,
eight hundred dollars per month payable in advance. Under the terms of the Joint Operating
Agreement with Medco International Ventures Limited (“Medco”), 50% of these costs are
expected to be recoverable.
Effective May 1, 2005, the Company agreed to sublease additional floor space in Calgary from
Vermilion. The terms of the amended agreement provide office space at a cost of six thousand,
three hundred and thirty-nine dollars per month plus a monthly operating cost charge of six
thousand, one hundred and twelve dollars per month. This agreement expires October 30, 2007.
18
Verenex Energy Inc. First Quarter Report – March 31, 2006
9. Commitments and Contingencies (continued)
The Company entered into negotiations with Vermilion for the early termination of its current
office lease. In return for a lease buy-out, the Company will receive a lump sum payment of
$400,000. Effective March 14, 2006, the Company agreed to lease floor space in Calgary
commencing June 1, 2006. The terms of the agreement provide office space at a cost of nineteen
thousand, nine hundred and twenty-eight dollars month plus a monthly operating cost charge of
nine thousand, one hundred and seventy-five dollars per month. This agreement expires May 31,
2011.
Libya
On January 30, 2005 the Company announced it had been selected as a successful bidder in
Libya’s Bid Round 1 for an Exploration and Production Sharing Agreement (“EPSA”). Verenex
has the right to explore for oil and gas in Area 47, a 6,182 square kilometre area in the
Ghadames Basin in northwest Libya. Verenex is the Operator with a 50% interest in Area 47 in
partnership with Medco, which holds the remaining 50% interest. The EPSA sets out the required
minimum work program during the initial 5-year exploration and appraisal period and defines the
terms for development, during a 25-year exploitation period, of any commercial discoveries made
during the initial 5-year period.
Under the terms of the EPSA for Area 47, Verenex and Medco (the “contractor group”) are
required to acquire new seismic, including 1,000 kilometres of 2-D and 200 square kilometres of
3-D, and drill three exploration wells during the 5-year exploration and appraisal period. All
exploration and appraisal costs during this period, including the minimum commitment program
and any additional seismic and drilling, will be borne 100% by Verenex and Medco. If the
minimum commitment program is not carried out, the contractor group will be liable for a specified
unit cost for seismic and wells which in aggregate is a maximum of US $20 million (US $10
million net to Verenex).
If a discovery is made on the block and the Parties (the Libyan National Oil Corporation (“NOC”)
and the contractor group) unanimously agree that it is commercial, a joint operating company
would be established to operate the discovery. Development capital expenditures would be
shared 50% by the contractor group and 50% by the NOC. Operating costs would be shared on
the basis of the production allocation split, with the contractor group paying 13.7% of these costs
and the NOC 86.3%. The NOC pays 100% of all royalties and Libyan taxes incurred on each
discovery, including the contractor group share.
As at March 31, 2006, the Contractor group had awarded a Canadian equivalent $9.0 million (US
$7.5 million) (gross) (Cdn. $4.5 million net to Verenex) contract for its 2006 seismic program and
work began in late December 2005 on surveying for the first 243 square kilometre 3-D seismic
shoot in the southern part of Area 47. Expenditures to date under this contract have amounted to
approximately $2.0 million (US $1.7 million) (gross) (Cdn. $1.0 million net to Verenex). In
addition, contracts were awarded to purchase casing, tubulars and wellhead equipment in
advance of the 2006 drilling program in the amount of $5.1 million (US $4.4 million) (gross) (Cdn.
$2.6 million net to Verenex). As at the end of March 2006, approximately $2.6 million (US $2.2
million) (gross) (Cdn. $1.3 million net to Verenex) had been billed.
France
The Company has commitments to its partner VREP in France on the Aquitaine Maritime permit.
At Aquitaine Maritime, VREP (the “Operator”) awarded a contract in 2005 to Petroleum Geo-
Services (”PGS”) to undertake a combined 2-D and 3-D offshore seismic program. The seismic
acquisition and subsequent processing is estimated to cost approximately $7.9 million Canadian
19
Verenex Energy Inc. First Quarter Report – March 31, 2006
9. Commitments and Contingencies (continued)
equivalent (US $6.6 million) (gross). The program commenced on September 3, 2005 and the
acquisition phase was completed on October 14, 2005. The new seismic is currently being
interpreted to remap leads and prospects with expected completion in May 2006. Verenex has a
50% participating interest in the permit and expects its share of the costs to be approximately
$4.2 million. As at March 31, 2006, the Company had recorded approximately $3.8 million in
expenditures relating to this commitment.
10. Subsequent Events
On April 11, 2006 the Company announced it had executed contracts for two drilling rigs for its
operations in Area 47 in Libya. The contract awards were approved by the Area 47 Management
Committee, which includes representatives from Verenex, partner Medco and the NOC.
The first rig, contracted with Oil Drilling & Exploration (Borneo) Pty Limited (“ODE”), a subsidiary
of Ensign Energy Services Inc. based in Calgary, Alberta, is expected to be available to spud the
Company’s first well late in the third quarter of 2006. The second rig, contracted with KCA
DEUTAG Drilling GmbH (“KCA DEUTAG”) based in Germany, is expected to be delivered in the
first quarter of 2007.
Both contracts include an initial two-year term, with two one-year extension options exercisable
by the Company. Under the contract terms, the Company retains the ability to assign the rigs to
third parties, with the approval of the contractor, if circumstances warrant. Maximum early
termination exposure under the two contracts in aggregate is $7.2 million (net Verenex 50%
share).
The contracts require that Letters of Credit (“LC’s”) be entered into in support of maximum
termination amounts, which vary over the life of the contract. As a result, the Company has
issued two letters of credit (“LC’s”) relating to the signing of the drilling contracts that back-stop
early termination provisions. The terms of the contract call for the LC’s to vary over the period of
the contract. The first LC expires on November 13, 2008 and is exercisable by Oil Drilling &
Exploration (Borneo) Pty Limited (“ODE”), a subsidiary of Ensign Energy Services Inc. based in
Calgary, Alberta. The ODE contract required that cash collateral of US $2.5 million (gross) to be
put in place initially. The second LC in favour of KCA DEUTAG Drilling GmbH based in Germany
(“KCA DEUTAG”), expires on April 30, 2009 and is supported by initial cash collateral of US $3.3
million (gross). The LC’s have provisions to increase these amounts to a maximum of US$ 12.0
million (gross) in aggregate at the projected spud dates, after which the LC amounts decline as
the rigs are worked.
The Company has received funds from its partner, Medco International Ventures Limited, for its
50% share of the cash collateral and the total amount of cash provided as support for the LC’s, in
the amount of $6.8 million, has been reflected as restricted cash on the balance sheet. The joint
venture payable related to restricted cash amounting to $3.4 million due to Medco has also been
segregated on the balance sheet.
20
Verenex Energy Inc. First Quarter Report – March 31, 2006
COMPANY INFORMATION
DIRECTORS
William T. Fanagan 1,2,3
West Vancouver, BC
Lorenzo Donadeo 3
President & CEO
Vermilion Energy Trust
Calgary, AB
Claudio A. Ghersinich 4
Executive Director
Carrera Investments Corp.
Calgary, AB
Gerry J. Macey 2,3,4
Calgary, AB
James D. (Jim) McFarland
President & CEO
Verenex Energy Inc.
Calgary, AB
Johannes J. (Jim) Nieuwenburg 2,4
Calgary, AB
1 Chairman
2 Audit Committee
3 Governance and Human Resources Committee
4 Independent Reserves and Environment,
Health & Safety Committee
OFFICERS & KEY
PERSONNEL
James D. (Jim) McFarland, P.Eng.
President & CEO
Kenneth D. (Ken) Hillier, C.A.
Chief Financial Officer
Blair Anderson
Manager, Exploration
Giuseppe (Joe) Arcuri
Manager, Geophysics
Fadi Nammour, P.Eng.
Manager, Business
Development & Operations
Don Shepherd, P.Eng.
General Manager, Libya
Charles W. Berard
Corporate Secretary
Partner, Macleod Dixon LLP
AUDITORS
Deloitte & Touche LLP
Calgary, Alberta
BANKERS
The Toronto-Dominion Bank
Calgary, Alberta
EVALUATION ENGINEERS
GLJ Petroleum Consultants Ltd.
Calgary, Alberta
LEGAL COUNSEL
Macleod Dixon LLP
Calgary, Alberta
TRANSFER AGENT
Computershare Trust Company of
Canada
STOCK EXCHANGE
Toronto Stock Exchange
Symbol - VNX
CORPORATE OFFICE
Suite 3050, 400 – 4th Avenue SW
Calgary, AB T2P 0J4 Canada
Telephone: +1-403-355-6280
Facsimile: +1-403-231-1774
www.verenexenergy.com
Verenex Energy Inc.
Suite 3050, 400 4th Avenue SW
Calgary, Alberta T2P 0J4
Telephone: +1 403 355 6280
Facsimile: +1 403 231-1774
www.verenexenergy.com
21
Da der eingefügte Link leider nicht funkionierte habe ich den Bericht kopiert und eingefügt.
