PAN ORIENT ENERGY CORP. MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014

Transcription

1 PAN ORIENT ENERGY CORP. MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014

2 August 19, 2014 Management s Discussin and Analysis The fllwing Management s Discussin and Analysis ( MD&A ) f the perating and financial results f Pan Orient Energy Crp. ( Pan Orient r the Cmpany ) is prepared effective August 19, 2014 and shuld be read in cnjunctin with the unaudited cndensed interim cnslidated financial statements fr the three and six mnths ended, 2014 and the audited cnslidated financial statements and ntes theret and MD&A fr the year ended December 31, The financial statements have been prepared in accrdance with Internatinal Financial Reprting Standards ( IFRS ). Pan Orient is an il and natural gas cmpany based in Calgary, Alberta, with prperties nshre Thailand, nshre and ffshre Indnesia and an interest in Andra Energy Crpratin ( Andra ) which has prperties in nrthern Alberta, Canada. Please nte that all amunts are in Canadian dllars unless therwise stated, represent the net amunt t Pan Orient s interests unless therwise stated, and BOPD refers t barrels f il per day net t Pan Orient. Frward-Lking Statements The MD&A cntains frward-lking infrmatin within the meaning f securities laws. Frward-lking statements and infrmatin cncerning anticipated financial perfrmance are based n management s assumptins using infrmatin currently available. Material factrs r assumptins used t develp frward-lking infrmatin include ptential business prspects, grwth strategies, the ability t add prductin and reserves thrugh develpment and explratin activities, prjected capital csts, gvernment legislatin, well perfrmance, the ability t market prductin, the cmmdity price envirnment and quality differentials and exchange rates. Althugh management cnsiders its assumptins t be reasnable based n these factrs, they may prve t be incrrect. Frward-lking infrmatin is ften, but nt always, identified by the use f wrds such as anticipate, assume, believe, estimate, expect, frecast, guidance, may, plan, predict, prject, shuld, will, r similar wrds suggesting future utcmes. Frwardlking statements in this MD&A include, but are nt limited t, references t: well drilling prgrams and drilling plans, estimates f reserves and ptentially recverable resurces, infrmatin n future prductin and prject start-ups and the status and likelihd f farmut negtiatins and agreements. By their very nature, the frward-lking statements cntained in this MD&A require Pan Orient and its management t make assumptins that may nt materialize r that may nt be accurate. The frward-lking infrmatin cntained in this MD&A is subject t knwn and unknwn risks and uncertainties and ther factrs, which culd cause actual results, expectatins, achievements r perfrmance t differ materially, including withut limitatin: imprecisin f reserve estimates and estimates f recverable quantities f il, changes in prject schedules, perating and reservir perfrmance, the effects f weather and climate change, the results f explratin and develpment drilling and related activities, demand fr il and gas, cmmercial negtiatins, ther technical and ecnmic factrs r revisins and ther factrs, many f which are beynd the cntrl f Pan Orient. Althugh Pan Orient believes that the expectatins reflected in its frward-lking statements are reasnable, it can give n assurances that the expectatins f any frwardlking statements will prve t be crrect. The Cmpany prvides frward-lking infrmatin with respect t reservir and resurce estimates related t Thailand and Canada and estimated csts assciated with wrk cmmitments in Thailand and Indnesia. Reserve and resurce estimates are prepared by independent reservir engineers and there are numerus uncertainties inherent in estimating quantities f il and the cash flws t be derived therefrm. In general, estimates f ecnmically recverable vlumes and the assciated future net cash flws are based upn a number f variable factrs and assumptins, such as histrical prductin frm the prperties, prductin rates, ultimate reserve recvery, timing and amunt f capital expenditures, marketability f cmmdities, ryalty rates, the assumed effects f regulatin by gvernmental agencies and future perating csts, all f which may vary frm actual results. All such estimates are t sme degree speculative, and classificatins f reserve and resurce vlumes are nly attempts t define the degree f speculatin invlved. The Cmpany s actual prductin, revenues and develpment and perating expenditures with respect t its reserve and resurce estimates will vary frm estimates theref and such variatins culd be material. The Cmpany s estimated cmmitments are based n internally-prepared budgets and assumptins and, in the case where a tender prcess has been cmpleted, actual cntracted amunts. The estimated expenditures as prvided by management will vary frm the actual amunts required t carry ut these cmmitments, and the difference may be significant. Because frward-lking infrmatin addresses future events and cnditins, it invlves risks and uncertainties that culd cause actual results t differ materially frm thse cntemplated by the frward-lking infrmatin. These risks and uncertainties include, but are nt limited t: cmmdity price vlatility; well perfrmance and marketability f prductin; transprtatin and refining availability and csts; explratin and develpment csts; the recverability f estimated reserve and resurce vlumes; the Cmpany s ability t add reserves thrugh develpment and explratin activities; fluctuatins in currency exchange rates; and changes in gvernment legislatin and regulatins, including ryalty and tax laws. The frward-lking statements cntained herein are as f August 19, 2014 and are subject t change after this date. Readers are cautined that the freging list f factrs that may affect future results is nt exhaustive and as such undue reliance shuld nt be placed n frward-lking statements. Except as required by applicable securities laws, with the exceptin f events r circumstances that ccurred during the perid t which the MD&A relates that are reasnably likely t cause actual results t differ materially frm material frward-lking infrmatin that was previusly disclsed t the public, the Cmpany disclaims any intentin r bligatin t update r revise these frward-lking statements, whether as a result f new infrmatin, future events r therwise. 2

3 Nn-IFRS Measures Management uses and reprts certain nn-ifrs measures in the evaluatin f perating and financial perfrmance. Unless identified as a nn-ifrs measure in this sectin all amunts presented in this MD&A are calculated in accrdance with IFRS. Funds flw frm peratins ( funds flw ), which represents cash flw frm perating activities prir t changes in nn-cash wrking capital, reclamatin csts and excluding the recvery f prir year incme taxes, is used by the Cmpany t evaluate perating perfrmance, leverage and liquidity. The fllwing table recnciles funds flw frm peratins t cash flw frm perating activities which is the mst directly cmparable measure calculated in accrdance with IFRS: ($thusands) Cash flw frm perating activities 3,881 6,337 8,480 12,533 Changes in nn-cash wrking capital 621 1, ,453 Settlement f decmmissining prvisin Recvery f prir year taxes - (1,785) - (1,785) Funds flw frm peratins 4,600 6,537 8,967 12,201 Funds flw frm peratins, funds flw frm peratins per barrel and funds flw frm peratins per share (basic and diluted) d nt have standardized meanings prescribed by IFRS and therefre may nt be cmparable t similar measures presented by ther issuers. Funds flw is nt intended t represent perating cash flw r perating prfits fr the perid nr shuld it be viewed as an alternative t cash flw frm perating activities, net earnings r ther measures f financial perfrmance calculated in accrdance with IFRS. All references t funds flw thrughut this MD&A are based n funds flw frm peratins after tax and befre changes in nn-cash wrking capital and reclamatin csts. Petrleum and Natural Gas Prperties The Cmpany s principal prperties are divided int three distinct grups: 1) partially develped cncessin lcated n-shre Thailand; 2) undevelped interests in Indnesia Prductin Sharing Cntracts ( PSCs ); and 3) undevelped Canadian il sands leases. Thailand At, 2014, the Cmpany has a 100% perated wrking interest in Cncessin L53/48 ( L53 ) in Thailand. Cncessins L53 is lcated apprximately 60 kilmeters west f Bangkk. Currently all f Pan Orient s prductin f crude il is frm Cncessin L53 and sld t a refinery wned by the Thai Natinal Oil Cmpany. The Cmpany s perated 20% wrking interest in Cncessin L45/50 ( L45 ) expired n April 27, Cncessin L53 Cncessin L53 is partially develped and has il prductin and an active drilling prgram. Oil prductin has averaged 741 BOPD fr the six mnths ended, 2014 and 769 BOPD fr the three mnths ended, Prved plus prbable reserves, as evaluated by Sprule Internatinal Limited f Calgary (the Cmpany s independent reservir engineers), as at December 31, 2013 assigned t the L53A, L53-D East and L53-G ilfields f Thailand Cncessin L53 was 1.5 millin barrels net t Pan Orient. This evaluatin reflects the discvery f the L53-G ilfield in The L53-G field prductin EIA was apprved by the Gvernment f Thailand n February 19, 2014 and three L53-G wells which had been shut in awaiting apprval f the prductin EIA were brught back n prductin n February 20, Cncessin L45 Cncessin L45 was an undevelped prperty with n prductin r assigned reserves. Pan Orient earned a 20% wrking interest in the Cncessin by cmpleting a 3D seismic prgram in Pursuant t the Farm-in Agreement, the Cmpany culd have elected t drill an additinal tw wells t earn an additinal 40% interest, hwever the Cmpany elected nt t drill these wells and the cncessin expired n April 27, Althugh the Cmpany nly earned a 20% interest pursuant t the Farm-in Agreement, the Cmpany was registered with the Gvernment f Thailand as hlding a 60% interest in the cncessin and was cmmitted t 60% f the unfulfilled cmmitment when the cncessin expired. As a result f the expiratin and the Cmpany s electin nt t drill the explratin wells, a net impairment lss f $3.3 millin was recrded in the furth quarter f 2013 relating t $2.8 millin f L45 seismic csts and $0.5 millin accrued fr unfulfilled cmmitments. 3

4 Indnesia At, 2014, the Cmpany wned interests in fur PSCs, with a 97% perated wrking interest in the Citarum PSC, a 77% perated wrking interest in the Batu Gajah and Suth CPP PSCs, and a 100% interest in the East Jabung PSC. A 3% carried interest is held by a third party n the Citarum PSC and a 23% carried interest is held by third parties n the Batu Gajah and Suth CPP PSCs. There were n reserves assigned t any f the Indnesia PSCs at, Citarum PSC At the Citarum PSC, the Cataka-1 explratin well cmmenced drilling n December 31, 2011 and was junked and abandned due t severe drilling difficulties. The Jatayu-1 explratin well cmmenced drilling in March 2012 and was suspended in September 2012 due t drilling difficulties. Jatayu-1 drilling recmmenced in December 2012 utilizing slim hle drilling equipment. A severe verpressure gas zne encuntered created an unacceptable level f well cntrl risk and frmatin water present in the gas zne suggested n cmmercial ptential resulting in the well being abandned. The Geulis-1 explratin well was drilled frm early Octber 2012 t early Nvember 2012 and the results indicated that the Geulis prspect is nt deemed cmmercially viable n a stand-alne basis, but may be cmmercially viable as part f a larger develpment shuld explratin success be achieved at the Cataka r Jatayu prspects. The well has been abandned. The Cataka-1A well cmmenced drilling in early December 2012 but was suspended in January 2013 due t numerus drilling rig issues and recmmenced drilling in May 2013 with a new drilling rig, well design and persnnel. The well encuntered numerus intervals f severely tectnically fractured shale that were highly unstable and given the drilling difficulties encuntered t date and the lw prbability f reaching the final bjective in the Paragi Limestne zne, the well has been abandned. Explratin drilling t date at the Citarum PSC has been very technically challenging and has nt led t cmmercial discveries. Pan Orient annunced in 2013 that the Cmpany was initiating a farm-ut prcess t seek a partner fr cntinued explratin f the Citarum PSC and the farm-ut prcess has cmmenced. As a result f the Cmpany s decisin t discntinue drilling, a net impairment charge f $92.6 millin was recrded in The Citarum PSC has significant prspectivity fr cmmercial quantities f crude il and natural gas, including the defined Cataka and Jatayu prspects, within a regin f existing infrastructure and a large deficit f natural gas supply relative t demand, gd fiscal terms and an attractive large cst recvery pl. The future value f the Citarum PSC is dependent n the success f explratin drilling peratins thrugh the intended farm-ut arrangement. If cmmercial prductin results frm explratin activities at the Citarum PSC, then Pan Orient will becme bligated t pay ryalties up t USD $16.0 millin as a deferred purchase price fr the 20% interest in the Citarum PSC purchased in Batu Gajah PSC At the Batu Gajah PSC, Pan Orient cmmenced the explratin drilling prgram in late March The Tuba Obi Utara-1 (NTO-1) explratin well drilled in the first half f 2011 encuntered 10.5 feet f gas pay within gd-quality sand near the tp f the Lwer Talang Akar frmatin ( LTAF ). The fllw-up NTO-1ST side track well encuntered the same LTAF gas sand frmatin identified at the NTO-1 well, but f lwer reservir quality. The SE Tiung-1 explratin well drilled in mid-2011 encuntered il shws and gd quality sands within the primary Lwer Talang Akar target hrizn but wire line lgging indicated the zne t be water bearing. The secndary bjective f the Gumai and Upper Talang Akar frmatin sands were als present, but interpreted as being water bearing. On January 16, ,730 square kilmeters (grss) f explratin lands were relinquished at the Batu Gajah PSC which nw hlds 793 square kilmeters (grss). In the first quarter f 2013 the Cmpany drilled tw explratin wells and cmmenced a 400 square kilmeter 3D seismic prgram at the Batu Gajah PSC. The Shinta-1 explratin well was spudded in the first quarter f 2013 and encuntered sub-cmmercial il in the primary Lwer Talangakar sandstne target. The Buana-1 well was als spudded in the first quarter f 2013 as an updip appraisal f the Nrth Tuba Obi-1 well drilled in 2011, which targeted natural gas in the Lwer Talang Akar frmatin. Open hle wire line lgs and pressure data indicated the sands t be water bearing. These results suggest the Buana-1 and the Nrth Tuba Obi-1 fault cmpartments are nt in cmmunicatin and the gas accumulatin encuntered in the Nrth Tuba Obi-1 well in 2011 is limited and sub-cmmercial. Fr the remainder f 2013 the Cmpany wrked t cmplete the acquisitin and evaluatin f the 400 square kilmeter 3D seismic prgram fcused n the eastern half f the PSC. In the third quarter f 2013, the peratr f the Lemang PSC (directly adjacent t Pan Orient s Batu Gajah PSC) annunced that significant hydrcarbns have been encuntered in tw wells. One is lcated apprximately 175 meters frm the shared Lemang / Batu Gajah PSC bundary and anther apprximately 500 meters frm the shared bundary. Mapping f the 2D seismic data ver these wells cmbined with the 2D seismic acquired by Pan Orient in 2010 and 3D seismic data purchased in 2014 indicates that a prtin f this structural clsure extends int Pan Orient s Batu Gajah PSC and perhaps the structural crest. Articles f the PSC cntract indicate that unitizatin will be mandatry in the event f a shared field. Pan Orient is currently wrking n the frnt end requirements t drill a well n this area. Pan Orient is seeking t farm-ut a prtin f the Cmpany s interests in the Batu Gajah PSC. Suth CPP PSC A 227 kilmeter 2D seismic prgram was cmpleted in the first half 2013 and after evaluatin f the seismic results the Cmpany decided t relinquish the Suth CPP PSC. As a result f this decisin, the Cmpany recrded a net impairment charge f $13.7 millin in Frmal relinquishment f the Suth CPP PSC is expected in the secnd half f East Jabung PSC At the East Jabung PSC the firm three year explratin cmmitment includes tw wells and 2D seismic acquisitin and prcessing. A 440 kilmeter 2D seismic prgram cmmenced in 2013 and was cmpleted by the end f April In the furth quarter f 2013 the Cmpany submitted an applicatin t the Gvernment f Indnesia ( GOI ) t vluntarily relinquish apprximately 3, square kilmeters f the PSC s ffshre area. At, 2014 the relinquishment has nt yet been finalized with the GOI. The result f the relinquishment des nt impact the PSC s nshre explratin activities. Pan Orient is seeking t farm-ut a prtin f the Cmpany s interests in the East Jabung PSC. 4

5 Canada Andra Energy Crpratin is a private il cmpany in which Pan Orient has 71.8% wnership. Its principal activities t date relate t the develpment f the Sawn Lake area il sands prperty in the Peace River Oil Sands Regin f Nrthern Alberta using the steam assisted gravity drainage ( SAGD ) recvery prcess. Andra is in pre-prductin phase and the cmmercial viability f the SAGD recvery prcess at Sawn Lake has nt yet been established. The Cmpany has received regulatry apprval t build and perate the SAGD demnstratin prject lcated in the Central Blck f Sawn Lake where Andra is the peratr and hlds a 50% wrking interest. The demnstratin prject has started with a 2013 phase cnsisting f ne SAGD well pair, a facility fr steam generatin, water handling and il treating, and water surce and dispsal facilities. In July 2013, Andra and its jint venture partners entered int an agreement fr the demnstratin prject at Sawn Lake, and Andra s jint venture partners elected t participate fr 50% and prvided the necessary funding t Andra. As part f the arrangement, a jint venture partner had the right t repurchase the 3% grss verriding ryalty ( GORR ) n their 40% wrking interest in the 12 sectins f the Central Blck subject t certain terms and cnditins. In the first quarter f 2014 the jint venture partner repurchased the GORR fr $2.7 millin. In the furth quarter f 2013, the ne SAGD well pair was drilled t a depth f apprximately 650 meters and have a hrizntal length f 750 meters. Wrk n cnstructin f the facility and pipeline installatin has been cmpleted in May Steam peratins cmmenced n May 21, 2014 and il prductin is anticipated in September Summarized financial infrmatin with respect t Andra is as fllws: As at and fr the As at and fr the ($thusands) Ttal assets 84,462 84,761 84,462 84,761 Ttal liabilities 8,259 7,672 8,259 7,672 Funds flw frm (used in) peratins 55 (70) (64) (73) Net lss (34) (24) (242) (255) 5

6 Financial and Operating Summary,, (thusands f Canadian dllars except where indicated) FINANCIAL Change Oil revenue, befre ryalties and transprtatin expense 7,285 8,475 14,035 15,919-12% Funds flw frm peratins (Nte 1) 4,600 6,537 8,967 12,201-27% Per share basic and diluted $ 0.08 $ 0.11 $ 0.16 $ % Funds flw frm (used in) peratins by regin (Nte 1) Canada (609) (65) (509) (188) 171% Thailand 5,423 6,632 10,404 12,492-17% Indnesia (214) (30) (928) (103) 801% Ttal 4,600 6,537 8,967 12,201-27% Net lss attributed t cmmn sharehlders (147) (97,677) (332) (97,336) -100% Per share basic and diluted $ (0.01) $ (1.73) $ (0.01) $ (1.72) -100% Wrking capital 41,291 52,091 41,291 52,091-21% Wrking capital & nn-current depsits 43,789 54,345 43,789 54,345-19% Lng-term debt % Petrleum and natural gas prperties Capital expenditures (Nte 2) 4,182 37,978 15,192 72,487-79% Dispsitins (Nte 3) - - (2,698) - 100% Shares utstanding (thusands) 56,760 56,760 56,760 56,760 0% Funds Flw frm (used in) Operatins per Barrel (Nte 1) Canada peratins $ (8.70) $ (0.75) $ (3.79) $ (1.17) 224% Thailand peratins % Indnesia peratins (3.05) (0.35) (6.92) (0.64) 980% $ $ $ $ % Capital Expenditures (Nte 2) Canada 2,576 2,268 6,722 4,492 50% Thailand ,145 3,433 32,938-90% Indnesia ,565 5,037 35,057-86% Ttal 4,182 37,978 15,192 72,487-79% Wrking Capital and Nn-current Depsits Beginning f perid 44,040 87,442 47, ,376-59% Funds flw frm peratins (Nte 1) 4,600 6,537 8,967 12,201-27% Prceeds frm 2012 sale f Thailand interests % Capital expenditures (Nte 2) (4,182) (37,978) (15,192) (72,487) -79% Dispsal f petrleum and natural gas assets (Nte 3) - - 2, % Settlement f decmmissining liabilities (98) - (98) - 100% Recvery f 2012 taxes - 1,785-1, % Accrued relinquishment csts - (2,778) - (2,778) -100% Freign exchange impact n wrking capital (745) (663) (649) (882) -26% Net prceeds n share transactins % End f perid 43,789 54,345 43,789 54,345-19% Canada Operatins Interest incme % General and administrative expense (Nte 4) (679) (411) (1,226) (841) 46% Current incme tax recvery % Realized freign exchange gain % Funds flw used in peratins (Nte 1) (609) (65) (509) (188) 171% Funds flw used in peratins per barrel Interest incme $ 0.87 $ 2.19 $ 1.11 $ % General and administrative expense (Nte 4) (9.70) (4.74) (9.14) (5.24) 74% Current incme tax recvery % Realized freign exchange gain % Canada Funds flw used in peratins $ (8.70) $ (0.75) $ (3.79) $ (1.17) 224% 6

7 ,, (thusands f Canadian dllars except where indicated) Change Thailand Operatins Oil sales (bbls) 70,016 86, , ,615-16% Average daily il sales (BOPD) by Cncessin L % Average il sales price, befre transprtatin (CDN$/bbl) $ $ $ $ % Reference Price (vlume weighted) and differential Crude il (Brent $US/bbl) $ $ $ $ % Exchange Rate $US/$Cdn % Crude il (Brent $Cdn/bbl) $ $ $ $ % Sale price / Brent reference price 86% 95% 87% 87% -1% Funds flw frm peratins (Nte 1) Crude il sales 7,285 8,475 14,035 15,919-12% Gvernment ryalty (364) (425) (693) (784) -12% Transprtatin expense (116) (141) (220) (252) -13% Operating expense (884) (911) (1,922) (1,663) 16% Field netback 5,921 6,998 11,200 13,220-15% General and administrative expense (Nte 4) (510) (388) (809) (752) 8% Interest incme % Current incme tax - - (1) (1) 0% Funds flw frm peratins 5,423 6,632 10,404 12,492-17% Funds flw frm peratins / barrel (CDN$/bbl) (Nte 1) Crude il sales $ $ $ $ % Gvernment ryalty (5.20) (4.89) (5.17) (4.88) 6% Transprtatin expense (1.66) (1.62) (1.64) (1.57) 4% Operating expense (12.63) (10.48) (14.33) (10.35) 38% Field netback % General and administrative expense (Nte 4) (7.28) (4.46) (6.02) (4.68) 29% Interest Incme % Current incme tax - - (0.01) (0.01) 0% Thailand - Funds flw frm peratins $ $ $ $ % Gvernment ryalty as percentage f crude il sales 5% 5% 5% 5% 0% SRB as percentage f crude il sales 0% 0% 0% 0% 0% Incme tax as percentage f crude il sales 0% 0% 0% 0% 0% As percentage f crude il sales Expenses - transprtatin, perating, G&A and ther 21% 17% 21% 17% 26% Gvernment ryalty, SRB and incme tax 5% 5% 5% 5% 0% Funds flw frm peratins, befre interest incme 74% 78% 74% 78% -5% Wells drilled Grss % Net % Indnesia Operatins General and administrative expense (Nte 4) (255) (47) (552) (122) 352% Explratin expense (Nte 5) 15 - (294) - 100% Realized freign exchange gain (lss) (82) % Indnesia Funds flw used in peratins (214) (30) (928) (103) 801% Wells drilled Grss % Net % (1) Funds flw frm peratins (cash flw frm perating activities prir t changes in nn-cash wrking capital, reclamatin csts and excluding the recvery f prir year incme taxes) is used by management t analyze perating perfrmance and leverage. Funds flw as presented des nt have any standardized meaning prescribed by IFRS and therefre it may nt be cmparable with the calculatin f similar measures f ther entities. Funds flw is nt intended t represent perating cash flw r perating prfits fr the perid nr shuld it be viewed as an alternative t cash flw frm perating activities, net earnings r ther measures f financial perfrmance calculated in accrdance with IFRS. (2) Cst f capital expenditures, excluding decmmissining prvisin and the impact f changes in freign exchange rates. (3) Jint venture partners in Andra s Sawn Lake SAGD demnstratin prject repurchased the 3% grss verriding ryalty n a prtin f the nn-wned wrking interests in 36.5 sectins fr $2.7 millin. (4) General & administrative expenses, excluding nn-cash accretin n decmmissining prvisin and stck-based payments. (5) Explratin expense relates t explratin csts assciated with the Citarum and Suth CPP PSCs that are n lnger being capitalized. (6) Tables may nt add due t runding. 7

8 2014 SECOND QUARTER OPERATING RESULTS Fr the secnd quarter f 2014, the Cmpany recrded ttal crprate funds flw frm peratins f $4.6 millin ($0.08 per share) and a net lss attributable t cmmn sharehlders f $0.1 millin ($0.01 lss per share). Fr the first six mnths f 2014, crprate funds flw frm peratins was $9.0 millin ($0.16 per share) and a net lss attributable t cmmn sharehlders f $0.3 millin ($0.01 lss per share). At, 2014 Pan Orient had $43.8 millin f wrking capital and nn-current depsits, and n lng-term debt. In additin, Pan Orient had $7.5 millin f equipment inventry t be utilized fr future Thailand and Indnesia peratins which is included in explratin and evaluatin assets in the cnslidated statement f financial psitin. Wrking capital and nn-current depsits were cmprised f $27.2 millin cash, $2.5 millin f nn-current depsits, $12.9 millin f Canadian taxes receivable and ther receivables f $7.0 millin and less payables f $5.8 millin. Capital expenditures were $4.2 millin fr the secnd quarter f 2014 and included $2.6 millin in Canada assciated with the Sawn Lake SAGD demnstratin prject f Andra Energy Crpratin ( Andra ), which is wned 71.8% by Pan Orient and cnslidated with Pan Orient fr reprting purpses, $0.9 millin in Thailand and $0.7 millin in Indnesia. During the first six mnths f 2014, capital expenditures were $15.2 millin with expenditures f $6.7 millin in Canada assciated with the Sawn Lake SAGD demnstratin prject, $3.4 millin in Thailand fr drilling the L53A Central well, wrkvers, ther explratin csts and inventry, and $5.0 millin in Indnesia fr cmpletin f seismic prgrams and ther explratin csts. Capital expenditures fr the first half f 2014 were funded by $9.0 millin f funds flw frm peratins, $2.7 millin frm a jint venture partner repurchasing a grss verriding ryalty interest at Sawn Lake as part f an verall agreement entered int in 2013 fr the advancement f the Sawn Lake demnstratin prject and the remaining $3.5 millin thrugh existing wrking capital. At, 2014 Pan Orient had utstanding capital cmmitments f $0.1 millin in Thailand assciated with Cncessin L53, $8.7 millin in Indnesia assciated with the East Jabung PSC, and $0.4 millin in Canada fr natural gas pipeline tie-in and tariff charges assciated with the Sawn Lake SAGD demnstratin prject f Andra. Thailand In the secnd quarter f 2014 Cncessin L53 average il sales increased 8% t 769 BOPD and generated $5.4 millin in after tax funds flw frm peratins, r $77.45 per barrel. This cmpares with il sales in the first quarter f 2014 f 712 BOPD and $5.0 millin in after tax funds flw frm peratins, r $77.69 per barrel. Oil sales increased 8% during the secnd quarter f 2014 primarily due t flush prductin frm successfully perfrating a new zne at the L53-D2ST3 well in May On a per barrel basis, after tax funds flw frm peratins f $77.45 in the secnd quarter f 2014 was cnsistent with the first quarter f 2014 and resulted frm il sales f $104.05, transprtatin expenses f $1.66, perating expenses f $12.63, general and administrative expenses f $7.28 and a ryalty t the Thailand gvernment f $5.20, and there was interest incme equivalent t $0.17. Oil revenue during the first half 2014 was allcated 21% t expenses fr transprtatin, perating, and general & administrative, 5% t the gvernment f Thailand fr ryalties, and 74% t Pan Orient. N wells were drilled in the secnd quarter f 2014 as the Cmpany waited fr EIA apprval fr several lcatins, including the L53A-Nrth prspect in the nrtheastern prtin f Cncessin L53 which is part f the planned three well drilling prgram fr the remainder f The L53-A Central explratin well drilled during the first quarter f 2014 failed t encunter cmmercial hydrcarbns and was abandned. Capital expenditures during the secnd quarter f 2014 at Cncessin L53 were $0.9 millin in Thailand primarily fr wrkvers, final drilling csts fr the L53-A Central explratin well and equipment inventry. Fr the first half f 2014 capital expenditures at Cncessin L53 have been $3.4 millin fr drilling the L53A Central well, wrkvers, equipment inventry and ther explratin csts and inventry. The Cmpany elected nt t cntinue explratin actives at Cncessin L45 and the cncessin expired n April 27, Indnesia Capital expenditures in Indnesia were $5.0 millin during the first half f 2014, with $4.3 millin in the first quarter and $0.7 millin in the secnd quarter. On a year t date basis, there have been capital expenditures f $4.5 millin at the East Jabung PSC related primarily t cmpleting the 440 kilmeter 2D seismic prgram, $0.4 millin at the Batu Gajah PSC related t capitalized general and administrative expenses, and $0.1 millin fr equipment inventry. Canada Capital expenditures fr the Sawn Lake SAGD demnstratin prject were $6.7 millin during the first half f 2014, with $4.1 millin in the first quarter and $2.6 millin in the secnd quarter. These expenditures related t cnstructin f the SAGD facility fr steam generatin, water handling and il treating, and fr final installatin f the water surce and dispsal facilities. 8

9 OUTLOOK Thailand On August 8, 2014 Envirnmental Impact Assessment ( EIA ) apprval was received fr six explratin drilling lcatins with fur individual well cellars each. Prductin EIA apprval was als part f all six lcatin applicatins, allwing fr accelerated lng term prductin in the event f success. The L53A-Nrth lcatin was ne f the six lcatins apprved with well cnstructin t cmmence in apprximately seven days and be cmpleted in apprximately seven weeks allwing fr rain delays during the current early mnsn perid. A number f steps have been taken t mitigate the impact f the mnsn rains n cnstructin including cvered strage f earth fill and cnstructin f a berm arund the well pad perimeter. The Cmpany currently plans t drill ne appraisal well at each f the L53-D East field and the L53-B prspect prir t drilling f the L53A-Nrth explratin well. The L53-D East lcatin will be targeting an undrilled fault cmpartment and the L53-B lcatin will be targeting numerus sands 20 t 25 meters up structure frm the riginal L53-B well that was drilled in 2011 and prduced small quantities f il frm tw sandstne intervals prir t being shut-in. N reserves were attributed t the targets in either f these appraisal wells in the 2013 year end reserves reprt. Drilling f the first well f the three well drilling prgram is anticipated t cmmence at the end f September with each well taking 10 t 14 days t cmpletin. Prductin is currently 583 BOPD and averaged 657 BOPD in July and 610 BOPD ver the past 30 days. Oil prductin levels have been impacted by the rescheduling f the drilling prgram due t the delay in receiving EIA apprvals. Indnesia East Jabung PSC Onshre Sumatra (Pan Orient peratr and 100% wnership) As disclsed n May 28th, Pan Orient has received a number f prpsals frm ptential farminees with regard t btain f an up t 50% wrking interest in East Jabung PSC. The Cmpany has accepted a nn-binding prpsal and is currently facilitating legal and financial due diligence n an exclusive basis while wrking twards binding farm-in and jint perating agreements. These agreements, if cncluded successfully, are anticipated t be cmpleted in September. Batu Gajah PSC Onshre Sumatra (Pan Orient peratr and 77% wnership) The Cmpany is currently in negtiatins n a nn-exclusive basis regarding the ptential farm-ut f an up t 40% wrking interest in the Batu Gajah PSC. In the past three weeks apprximately 120 square kilmeters f 3D seismic data cvering a large prtin f the Akatara-Selng il and gas discvery area made by anther peratr directly adjacent t ur acreage at the Batu Gajah PSC has been purchased after being nly recently made available by the Indnesian Gvernment technical data administratr. The preliminary results f the interpretatin f this high quality 3D seismic data cntinues t indicate the Cmpany s view that the Selng il discvery extends int Pan Orient s adjacent Batu Gajah PSC acreage. On the basis f this newly available seismic data, the Cmpany has selected three drilling lcatins fr which Frestry Ministry apprval will be sught. It is estimated this apprval prcess will take apprximately fur mnths and culd be fllwed by drilling in mid Citarum PSC Onshre Java (Pan Orient peratr and 97% wnership) Pan Orient cntinues t perate a data rm fr ptential farmin parties and is seeking a 50% partner. This prcess cntinues t prceed. Canada - Sawn Lake (perated by Andra, in which Pan Orient has a 71.8% wnership interest) Andra has a 50% wrking interest in the Sawn Lake SAGD demnstratin prject, and is the peratr. The first step twards determining the cmmercial viability f the SAGD recvery prcess at Sawn Lake is fr the demnstratin prject t prvide an indicatin f the prductivity f the reservir and the amunt f steam injectin required t prduce the bitumen, which are key cmpnents in assessing the ptential fr SAGD develpment at Sawn Lake. Fr Phase 1 f the SAGD demnstratin prject, ne SAGD well pair was drilled in the furth quarter f 2013 t a depth f 650 meters and has a hrizntal length f 780 meters. Cnstructin f the SAGD facility fr steam generatin, water handling and il treating was cmpleted in Steam injectin at the Sawn Lake SAGD demnstratin prject cmmenced n May 21, Steam has been injected int bth the SAGD injectr well and the SAGD prductin well fr apprximately three mnths. These wells are being mnitred t determine the timing fr recmpleting the SAGD prductin well fr prductin. It is expected that bitumen prductin will cmmence in early September

10 Oil Prductin and Revenue Cncessin L53 averaged il sales f 769 BOPD fr the three mnths ended, 2014 cmpared t 712 BOPD in the first quarter f 2014 and 955 BOPD in secnd quarter f Cncessin L53 il sales increased in the secnd quarter f 2014 cmpared t the first quarter primarily due t increased prductin frm the L53-D and L53-G fields. The L53-G field was shut-in during the first quarter f 2014 until the envirnmental impact assessment ("EIA") was apprved n February 19, Prductin frm the L53-D field increased in the secnd quarter f 2014 after perfrating and replacing the ESP pump at the L53-D2ST3 well. Oil sales in the secnd quarter f 2014 cmpared t the secnd quarter f 2013 have declined primarily due t lwer prductin frm the L53-A and L-53D fields. Oil revenue was $7.3 millin fr the three mnths ended, 2014 cmpared t $6.8 millin in the first quarter f 2014 and $8.5 millin in the secnd quarter f Increased il revenue in the secnd quarter f 2014 cmpared t the first quarter f 2014 is primarily attributable t increased prductin vlumes partially ffset by a slightly lwer realized price per barrel. Decreased il revenue in the secnd quarter f 2014 cmpared t the secnd quarter f 2013 is primarily attributable t lwer prductin vlume in 2014 ffset by a higher realized price per barrel. The Cmpany s average realized price fr its il sales was $ per barrel in the secnd quarter f 2014 cmpared t $ per barrel in the first quarter f 2014 and $97.47 in the secnd quarter f The Cmpany s realized sales price has histrically been in the range f 85% t 95% f the Brent reference price, with the discunt attributed t the high paraffin cntent f the petrleum and heavier crude il as a prtin f il sales. The Cmpany s realized price was 86% f Brent reference price in the secnd quarter f 2014 cmpared t 87% in the first quarter f 2014 and 95% in the secnd quarter f Ryalties The Cmpany pays ryalties n crude il sales in Thailand t the Thai gvernment. The ryalty rate paid t the Thai gvernment is based n a sliding scale ranging frm 5% n prductin f less than 2,000 BOPD t 15% n prductin in excess f 20,000 BOPD per cncessin. Ttal ryalties were 5% f sales revenue in bth the first and secnd quarters f 2014 and the secnd quarter f 2013 as prductin vlumes did nt exceed 2,000 BOPD in any cncessin. Transprtatin Expenses Transprtatin expenses represent the cst t truck the Cmpany s Thailand il prductin t the refinery in Bangkk. The Cmpany is charged a cntracted rate based n the number f tankers and trips required; and bth factrs are driven by prductin vlumes. Transprtatin expense averaged $1.66 per barrel in the secnd quarter f 2014 cmpared t $1.62 per barrel in the first quarter f 2014 and $1.62 per barrel in the secnd quarter f Transprtatin expense per barrel in the secnd quarter f 2014 is cnsistent with the transprtatin expense per barrel incurred in the first quarter f 2014 and the secnd quarter f 2013 as the il was trucked frm similar well lcatins. Operating Expenses Operating expenses are assciated with il prductin in Thailand. Operating csts were $0.9 millin ($12.63 per barrel) in the secnd quarter f 2014 cmpared t $1.0 millin ($16.19 per barrel) in the first quarter f 2014 and $0.9 millin ($10.48 per barrel) in the secnd quarter f On a per barrel basis, perating expenses were lwer in the secnd quarter f 2014 than the first quarter f 2014 due t higher il prductin and lwer expenses assciated with equipment rental and fuel. On a per barrel basis, perating expenses were higher in the secnd quarter f 2014 cmpared t 2013 due t lwer prductin vlumes in 2014 and fixed csts that did nt decline with prductin vlume. Depletin and Depreciatin (D&D) ($thusands) Depletin f Thailand PP&E (1) 3,706 3,177 7,094 6,768 Depreciatin f ffice equipment and assets Ttal D&D 3,774 3,265 7,232 6,942 Ttal D&D - per barrel $ $ $ $ (1) Including decmmissining cst As the Cmpany s Canadian and Indnesian assets are in the pre-prductin phase depletin is nt calculated fr these cst centres. Thailand csts subject t depletin in the secnd quarter f 2014 included $17.0 millin f estimated future develpment csts fr prved plus prbable reserves cmpared t $9.3 millin f estimated future develpment csts included in the secnd quarter f The D&D expense per barrel is higher in secnd quarter f 2014 cmpared t the secnd quarter f 2013 due t the higher cst base frm nging capital spending activity in Cncessin L53 and higher estimated future develpment csts included in the depletable base. The D&D expense in first quarter f 2014 was $53.93 per barrel. 10

11 Taxes ($thusands) Canadian incme tax (recvery) expense - (1,855) - (1,937) Thai incme tax expense (1) Special remuneratry benefit (2) Ttal current tax (recvery) expense - (1,855) 1 (1,936) Deferred tax (recvery) expense 845 2,620 1,619 3,830 Ttal tax expense ,620 1,894 (1) Incme tax in Thailand is calculated at 50% ( %) n petrleum incme and 20% ( %) n nn-petrleum incme. Taxable incme in Thailand is cmprised f cash flw frm peratins befre changes in wrking capital less capital expenditures and ther permitted deductins. (2) Thailand Special remuneratry benefit ( SRB ) is a tax at sliding scale rates f 0-75% applied n a cncessin-by-cncessin basis t petrleum prfits as defined in Thai tax legislatin which includes deductins fr expenses and capital spent. The rate is principally determined by revenue fr the cncessin (prductin and pricing) but is subject t ther adjustments such as changes in Thailand's cnsumer and whlesale price indices and cumulative meters drilled n the cncessin. At, 2014 the Cmpany had a Thai tax payable f ne thusand dllars related t taxes n nn-petrleum revenue. The Cmpany cntinues t utilize nn-capital incme tax lsses and SRB lsses frm Cncessin L53 t shelter its petrleum incme frm incme tax and SRB tax. It is uncertain when SRB will be payable n the Cncessin. Because f the deductins allwed fr capital spent, the effective rates f these taxes can vary significantly frm the actual tax rates. Fr the three mnths ended, 2014 SRB was 0.0% ( %) f ttal revenue and incme tax was less than ne percent (2013 0%) f ttal revenue. In Canada, $12.9 millin f taxes receivable is the result f lsses recgnized in 2013 n lans made t the Cmpany s subsidiaries which hld the Suth CPP and Citarum Prductin Sharing Cntracts in Indnesia. Lsses frm 2013 are being carried back and applied t a gain in 2012 n the sale f the Cmpany s Thailand interests t recver taxes paid in The recvery f Canadian incme taxes is based n management s applicatin f current incme tax laws and may be assessed differently by the Canadian taxatin authrities. In July 2013 the Tax Directrate General f Indnesia assessed several il and gas cmpanies perating in Indnesia fr Land and Building Tax using a new framewrk which is being challenged by the impacted il and gas cmpanies in Indnesia. Pan Orient was issued a tax payable ntificatin fr $7.2 millin. The Cmpany has filed an bjectin letter and this amunt is nt recrded in the cnslidated financial statements and is pending the utcme f the bjectin filed. General and Administrative (G&A) Expenses ($thusands) Thailand , Indnesia 799 1,583 1,600 3,077 Canada , Ttal G&A, net f verhead recveries (1) 2,122 2,561 4,014 4,996 Allcated t capital prjects (2) (678) (1,715) (1,427) (3,281) Cash G&A 1, ,587 1,715 Accretin expenses Stck-based payments Gain n settlement f decmmissining prvisin - (15) - (15) Ttal G&A 1, ,680 1,746 Cash G&A per barrel $ $ 9.73 $ $ Ttal G&A per barrel $ $ 9.84 $ $10.87 (1) Overhead recveries represent the prtin f Pan Orient s G&A expenses charged thrugh jint ventures perated by the Cmpany t wrking interest partners and capital prjects. Overhead recveries were $330,000 fr the six mnths ended 2014 (2013 nil). (2) Capitalized G&A allcated t capital prjects represents cmpensatin and ther csts assciated with prperty acquisitin, and explratin and develpment activities. Capitalized G&A relates t explratin and develpment activities at Cncessin L53 in Thailand, all fur f the Indnesia PSCs (althugh n capitalizatin f G&A after the secnd quarter f 2013 fr the Citarum and Suth CPP PSCs) and the Cmpany s heavy il develpment prject in Canada. Amunts capitalized reflect the nature f the Cmpany s capital activities and are reassessed at each reprting perid. G&A csts incurred in Thailand fr the first six mnths f 2014 are fairly cnsistent with the G&A csts incurred during the first six mnths f G&A csts incurred in Indnesia are lwer in 2014 than in 2013 as the Cmpany has been less active in its Indnesian explratin prgram. G&A incurred in Canada in 2014 is higher than G&A incurred in 2013 as Canada is nt recrding a 11

12 recvery frm its Indnesia peratins in Less G&A was capitalized in 2014 cmpared t 2013 due t reduced verall G&A incurred and the Cmpany discntinued capitalizing G&A relating t the Citarum and Suth CPP PSCs in Indnesia after impairment was recrded fr these PSC in Explratin Expenses In 2013 the Cmpany recgnized a full impairment charge n its Citarum and Suth CPP assets in Indnesia. In 2014, all explratin csts incurred by these PSCs have been expensed as Explratin expenses rather than capitalized. Capital Invested Capital expenditures (1) $000s Net wells drilled $000s Net wells drilled $000s Net wells drilled $000s Net wells drilled Thailand , , , Indnesia (2) , ,037-35, Canada 2,576-2,268-6,722-4,492 - Ttal capital expenditures 4,182-37, , , (1) Excluding freign exchange and decmmissining prvisin. (2) Amunts recrded in the MD&A and financial statements fr capital expenditures related t the Indnesia PSCs include the amunt paid by Pan Orient n behalf f the carried interest partners. If cmmercial prductin is established fr a PSC, the amunts previusly paid by Pan Orient n behalf f the carried interest partners will be recverable thrugh the partner s share f crude il r natural gas prduced frm that PSC. The calculatin f net wells is based n Pan Orient s wrking interest f 100% at Citarum and Batu Gajah and is nt reduced fr the carried interests held by third parties f 3% at the Citarum PSC and 23% at the Batu Gajah PSC. Thailand Capital expenditures f $3.4 millin fr the six mnths ended, 2014 relate t Cncessin L53 and include $1.9 millin fr the L53A-Central explratin well, $0.5 millin fr equipment inventry, $0.3 millin fr wrkvers, $0.2 millin fr capitalized G&A and $0.5 millin fr ther capital expenditures. Capital expenditures in the secnd quarter f 2014 relate t $0.1 millin fr the L53A- Central well, $0.2 millin fr wrkvers, $0.2 millin fr equipment inventry $0.1 millin fr capitalized G&A and $0.3 millin fr ther capital expenditures. Indnesia Capital expenditures f $5.0 millin fr the six mnths ended, 2014 relate t $4.5 millin at the East Jabung PSC related primarily t the 440 kilmeter 2D seismic prgram, $0.4 millin at the Batu Gajah PSC related t capitalized G&A, and $0.1 millin fr equipment inventry. Capital expenditures in the secnd quarter f 2014 relate t $0.5 millin at the East Jabung PSC fr seismic and capitalized G&A and $0.2 millin at the Batu Gajah PSC fr capitalized G&A. Canada Capital expenditures f $6.7 millin fr the six mnths ended, 2014 relate t the Sawn Lake demnstratin prject. Expenditures include cnstructin csts fr a SAGD facility fr steam generatin, water handling and il treating, and fr final installatin f the water surce and dispsal facilities. Capital expenditures in the secnd quarter f 2014 relate t $1.7 millin fr the SAGD facility, $0.6 millin fr capitalized pre-perating csts and $0.3 millin fr ther capital expenditures. Liquidity and Capital Resurces Pan Orient s capital prgram in the secnd quarter f 2014 was $4.2 millin and was financed by $4.6 millin f funds flw frm peratins. Pan Orient s wrking capital psitin is frecasted regularly and the Cmpany plans t fund future capital expenditures and cmmitments with existing cash balances, equipment inventry and expected cash flws frm Thailand peratins. At, 2014 the Cmpany s wrking capital plus nn-current depsits f $43.8 millin exceeded estimated utstanding cmmitments f $9.2 millin by $34.6 millin. At, 2014 the Cmpany had $7.5 millin f equipment inventry t be utilized fr future Thailand and Indnesia peratins. The equipment inventry is included in explratin and evaluatin csts in the statement f financial psitin. At, 2014 Pan Orient s cash and cash equivalents f $27.2 millin, cmpared t $41.8 millin at December 31, 2013 and were held in the jurisdictins where the Cmpany perates as fllws: ($thusands), 2014 December 31, 2013 Cash held in Canada 21,054 37,244 Cash held in Thailand 3,838 2,311 Cash held in Indnesia 2,282 2,276 Ttal cash 27,174 41,831 12

13 Wrking capital plus nn-current depsits at, 2014 was $43.8 millin cmpared t $44.0 millin at March 31, 2014 and $54.3 millin at, Nn-current cash depsits f $2.5 millin at, 2014 relate t a $1.6 millin perfrmance bnd in Indnesia which will be returned t the Cmpany upn cmpletin f the cmmitments at the East Jabung PSC, $0.7 millin in guarantees t the Thailand gvernment fr custms imprtatin permits and a $0.2 millin depsit in Canada with the Alberta Energy Regulatr. Share Capital Outstanding (thusands) As at August 19, 2014 As at, 2014 Cmmn shares 56,760 56,760 Stck ptins 3,211 3,261 Ttal 59,971 60,021 Freign Exchange The Cmpany s reprting currency is the Canadian dllar and its functinal currencies are the Canadian dllar, the Thai baht and the US dllar. In each reprting perid, the changes in the values f the Thai baht and U.S. dllar relative t the Cmpany s reprting currency are recgnized. The perid end rates used t translate the Cmpany s Thai baht and U.S. dllar denminated financial statement items fr the reprting perids as specified are as fllws: Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Rate at end f perid Thai baht / CDN $ exchange CDN $ / US $ exchange A fundamental aspect f the Cmpany s treasury functin is mitigating the effect f freign currency exchange fluctuatins t the greatest extent pssible. T accmplish this, surplus funds are mved t Canada t be held in Canadian dllars. An apprpriate cushin f Thai baht is held in Thailand t satisfy payments in that currency as they cme due, the mst significant f which are the Cmpany s SRB and taxes. Thailand uses Thai Baht and Indnesia uses the US dllar as their functinal currencies fr reprting, which are translated t Canadian dllars at each reprting perid with the unrealized translatin gain r lss being recgnized in accumulated ther cmprehensive incme ( AOCI ). In the first quarter f 2014 the US dllar and Thai baht appreciated against the Canadian dllar which resulted in an unrealized freign exchange gain n the Cmpany s freign peratins. AOCI in the cnslidated statement f financial psitin is reprted as fllws: ($thusands) AOCI, beginning f perid 7,990 1,244 2,536 (4,297) Unrealized freign currency translatin gain (lss) (5,165) 2, ,253 AOCI, end f perid 2,825 3,956 2,825 3,956 The unrealized freign currency translatin gain is as fllws: ($thusands) Freign exchange gain (lss) related t Thailand (2,305) (1,821) 305 1,161 Freign exchange gain (lss) related t Indnesia (2,860) 4,533 (16) 7,092 Ttal change in AOCI (5,165) 2, ,253 13