For the Nine. Nine Months ended BONTERRA ENERGY REPORTS THIRD QUARTER 2013 FINANCIAL AND OPERATING RESULTS. September 30, 2013

Transcription

1 Q3 For the Nine Months ended TSX: BNE BONTERRA ENERGY REPORTS THIRD QUARTER FINANCIAL AND OPERATING RESULTS HIGHLIGHTS Three months ended Nine Months ended As at and for the periods ended ($ 000s except for $ per share) FINANCIAL Revenue realized oil and gas sales 78,946 35, , ,146 Funds flow (1)(5) 46,874 21, ,215 60,633 Per share basic Per share diluted Payout ratio 56% 71% 53% 76% Funds flow (2)(5) 46,874 21, ,034 60,633 Per share basic Per share diluted Payout ratio 56% 71% 52% 76% Cash flow from operations 43,953 16, ,124 52,865 Per share basic Per share diluted Payout ratio 60% 94% 58% 87% Cash dividends per share Net earnings 19,690 7,746 47,504 27,129 Per share basic Per share diluted Capital expenditures and acquisitions, net of dispositions 34,025 27,360 83,262 (4) 74,061 (3) Total assets 1,002, ,812 Working capital deficiency 43,681 49,808 Long term debt 147, ,779 Shareholders equity 671, ,839 OPERATIONS Oil (barrels per day) (1) 7,310 4,108 7,727 3,912 NGLs (barrels per day) (1) Natural gas (MCF per day) (1) 22,274 12,583 21,668 12,200 Total barrels of oil equivalent per day (BOE) (1) 11,794 6,666 12,100 6,381 Total barrels of oil equivalent per day (BOE) (2) 11,794 6,666 12,508 6,381 (1) Nine month figures for include the results of Spartan Oil Corp. (Spartan) for the period of January 25, to. Production includes 249 days for Spartan and 273 days for Bonterra. (2) Nine month figures for include the results of Spartan for the period of January 1, to. Production includes 273 days for Spartan and Bonterra. (3) Includes an acquisition that closed on June 7, for $17,108,000. (4) Includes the Spartan acquisition that closed on January 25, that included $10,000,000 of acquired cash that reduced capital expenditures from $61,643,000 excluding dispositions. (5) Funds flow is not a recognized measure under IFRS. For these purposes, the Company defines funds flow as funds provided by operations including proceeds from sale of investments and investment income received excluding the effects of changes in non cash working capital items and decommissioning expenditures settled. 1 P age

2 REPORT TO SHAREHOLDERS Bonterra Energy Corp. (Bonterra or the Company) is pleased to announce its financial and operational results for the three months and nine months ended. In addition, the Company is pleased to announce its Board of Directors has approved both a 2014 capital expenditure program budgeted at $120 million and an increase to the monthly dividend to $0.29 per share beginning with the November dividend payable December 31,. Financial and Operational Highlights In, Bonterra has maintained its focus on providing investors with continued growth on a per share basis, a sustainable pace of development and monthly income through its dividend policy. For the nine month period, Bonterra has achieved record results in net earnings, funds flow, production volumes and the monthly dividend rate despite one time charges with regard to royalties and general and administrative costs totaling approximately $4.3 million. Quarter over quarter financial results were somewhat negatively impacted by a number of factors including planned decreased production volumes, royalty adjustments relating to prior periods, lower natural gas prices, pipeline apportionments which required the Company to shut in production and an increase in oil inventory. It should be noted the following comparatives use January 25, as the date when Spartan production commenced. Highlights include: Generated record funds flow in the first nine months of of $138.2 million ($4.63 per share), as compared to $60.6 million ($3.07 per share) in the same period for, an increase of percent. Third quarter funds flow was $46.9 million, a decrease of 7.3 percent over the previous quarter, mainly attributable to a reduction of production volumes of 6.6 percent (partially planned and partially for reason outlined above); Average daily production was 12,100 boe per day during the first nine months of, an increase of 89.6 percent over the first nine months of. In the third quarter of, production averaged 11,794 boe per day, a decrease of 6.6 percent over the second quarter of. The increased production year over year is mainly due to the Spartan acquisition and better results from the Company s Cardium drill program. The quarter over quarter decrease is mainly due to natural production declines associated with flush production on wells drilled in the first quarter. In addition, approximately 220 boe per day of production was shut in due to plant turnarounds and other facility maintenance programs or stored in field inventory. Fourth quarter production levels are anticipated to increase as the Company will record a full quarter of production from wells drilled and tied in during the third quarter as well as new production associated with the fourth quarter drilling program. Full year production guidance is maintained at 12,000 boe per day; Operating costs for the first nine months of the year were $13.00 per boe, a reduction of 18.8 percent over the same period in. Quarter over quarter operating costs per boe increased 28.6 percent mainly as a result of scheduled facility and maintenance programs executed during the quarter and lower production volumes. The Company continues to anticipate annual operating costs to average $13.00 per boe for as the majority of scheduled seasonal turnarounds and maintenance programs have been completed and production volumes are anticipated to increase; Paid out $0.84 per share in cash dividends to shareholders in Q3 and $2.48 for the nine month period. This represents a payout ratio of 53 percent of funds flow for the nine month period which is on the low end of the Company s payout ratio guidance of 50 to 65 percent of funds flow; and Completed a bought deal financing of 553,725 common shares at a price of $49.85 per common share for gross proceeds of $27.6 million. The funds were used to increase the capital development budget and to decrease outstanding bank debt. Bonterra s net debt to cash flow ratio at is 1.14 to 1 times providing the Company with one of the strongest balance sheets amongst its peers leading to significant financial flexibility. The Company continues to closely monitor this ratio by managing its cash 2 P age

3 flow, capital expenditure ranges and dividend payments and expects to remain well within its targeted guidance range for Corporate Guidance The Board of Directors has approved a capital development program of $120 million which will include the drilling of light oil wells, infrastructure and gathering systems but excludes acquisitions. Currently 56 gross (41.05 net) wells are planned with 28 gross (27.6 net) wells targeting the company s Carnwood play in the Pembina Cardium field; Full year production levels are expected to average between 12,400 and 12,700 BOE per day; The corporate production profile is anticipated to be approximately 72 percent light oil and liquids and 28 percent natural gas (mainly solution gas); Operating costs are expected to be approximately $13.00 per BOE; Bonterra anticipates fully funding its capital expenditure program out of cash flow, proceeds from the exercise of employee stock options, sale of investments and, if required, its bank borrowing facility; The dividend payout ratio is estimated to range between 50 and 65 percent of funds flow in As above, Bonterra will be increasing the dividend to $0.29 per share beginning with the dividend payable on December 31,. Bonterra's Board of Directors and management will continue to take into account production volumes, commodity prices and costs in determining monthly dividend amounts; Bonterra will continue to maintain its balance sheet strength and forecasts its net debt to annualized cash flow from operations to be within a range of 1.0 to 1.5 times; and Bonterra has approximately $578 million in tax pools, extending the company's estimated tax horizon to Bonterra's capital development program may be affected by items such as drilling results, commodity prices, and industry, regulatory and economic conditions. The Board of Directors and management will regularly review the capital program during the year and will make any adjustments to the amount and targets if required. The corporate guidance for 2014 is based on estimated future crude oil and natural gas prices and as such, guidance estimates may fluctuate with changes in commodity prices. Capital expenditure guidance excludes potential acquisitions which will be separately considered and evaluated. Well Positioned for Continued Growth in 2014 In, Bonterra's focus to developing its Cardium acreage shifted to main pool development and the optimization of overall recoveries. The Company spent approximately $95.7 million on its capital development program during the nine months of the year and drilled 24 gross (23.8 net) operated Cardium horizontal wells and twelve (2.7 net) non operated wells. The third quarter was active for the Company s drilling operations following spring break up and included nine gross (9.0 net) operated wells and 10 gross (2.4 net) non operated wells. Fourth quarter drilling is expected to include an additional 21 gross (9.9 net) wells which will include 6 (5.9 net) operated wells in the Carnwood area. Bonterra s drill program in the second half of the year is concentrated in the Carnwood area in which its land position includes 38 gross (35 net) sections. The Carnwood area was historically underdeveloped with vertical wells and is characterized by high levels of original oil in place and low current recoveries. The Carnwood area is expected to be developed at eight horizontal wells per section which represents a drilling inventory of approximately 305 gross (280 net) locations in this one area of the Cardium alone. 3 P age

4 Bonterra has delineated the outer edges of the Carnwood area with the well on the western edge and the well on the eastern edge of the area. These wells have recorded some of Bonterra s best production results to date and have produced 36,958 barrels of oil and 57,716 barrels of oil, respectively, over a nine month cumulative period. During Q3, Bonterra drilled three additional wells in Carnwood of which one, the well, is currently on production with the other two expected to be tied in and on production in Q4. This well is currently performing favourably with a 30 day rate of 300 boe per day, including 260 barrels of oil per day. With the outer edges of the Carnwood area delineated, the Company now intends to target increased well density throughout the area with a targeted pad drilling program in Q4 and into Bonterra has successfully reduced costs and improved well performance through the application of new drilling and completion technologies and efficient drill programs. The 2014 capital development program s focus in the Carnwood area signifies Bonterra s move towards a full field development exploitation strategy with four well pad drilling comprising the majority of the program. Bonterra intends to run two rigs in 2014 and will dedicate one rig solely to the Carnwood area where the average number of days to drill a well will be approximately six to nine days (24 32 days to drill a four well pad). In addition, Bonterra will shift to drilling longer horizontal lengths of 1.5 miles (previously one mile) and will increase frac density. As well, the Company has transitioned to a cemented completion method with limited entry sleeves, which provides both better frac placement control and drainage pattern. The focus on full field development along with improvements to drilling and completion methods has served to significantly decrease costs. Bonterra s average well cost is anticipated to be $2.7 million in Additional capital spending in 2014 will include reactivating a gas plant at in the first quarter. The reactivation will reduce operating costs as the Company will be able to redirect gas production from the Carnwood area to this plant. As well, it is anticipated that a portion of the 2014 capital development program will be allocated to two enhanced recovery pilot projects, a waterflood and a gas flood on two different pads in the Carnwood area, to examine the potential for secondary recovery methods on Bonterra s Cardium lands. Enhanced recovery methods have the ability to significantly increase reserve recovery and incremental value across a large portion of the Company s asset base and the pilot projects are expected to begin in the first half of Outlook Bonterra is committed to continue to create and deliver outstanding value on behalf of its investors by pursuing the disciplined development of its light oil targets in the Cardium zone to drive future growth. In 2014, the Company will again focus on improving production rates, sustaining a consistent pace of development and increasing project economics. The Company s conservative financial management, strong operational execution and focus on sustainability should allow Bonterra to continue to capitalize on its numerous opportunities, pay a substantial dividend and maximize shareholder value. One issue that is of concern to the Company and to the industry is the differential between WTI oil prices and the realized price received by the Company. During the fourth quarter, the differential has been fluctuating between $6.00 and $20.00 and will have an effect on funds flow. The general industry consensus is that it will not stay at this level for an extended period of time as additional oil is increasingly being delivered by rail or additional pipeline capacity. However, it will have an impact on fourth quarter results. Management would like to take this opportunity to thank the Board of Directors for its reliable counsel and investors for their continued support. Bonterra is well positioned with the capacity to continue delivering strong returns to shareholders and looks forward to capitalizing on its many opportunities in the last quarter of and into George F. Fink Chief Executive Officer and Chairman of the Board 4 P age

5 MANAGEMENT S DISCUSSION AND ANALYSIS The following report dated November 11, is a review of the operations and current financial position for the three and nine months ended for Bonterra Energy Corp. (Bonterra or the Company) and should be read in conjunction with the unaudited condensed financial statements and the audited financial statements including the notes related thereto for the fiscal year ended December 31, presented under International Financial Reporting Standards (IFRS). Use of Non IFRS Financial Measures Throughout this Management s Discussion and Analysis (MD&A) the Company uses the terms payout ratio, cash netback and net debt to analyze operating performance, which are not standardized measures recognized under IFRS and do not have a standardized meaning prescribed by IFRS. These measures are commonly used in the oil and gas industry and are considered informative by management, shareholders and analysts. These measures may differ from those made by other companies and accordingly may not be comparable to such measures as reported by other companies. The Company calculates payout ratio by dividing cash dividends paid to shareholders by cash flow from operating activities, both of which are measures prescribed by IFRS which appear on our statements of cash flows. We calculate cash netback by dividing various financial statement items as determined by IFRS by total production for the period on a barrel of oil equivalent basis. Frequently Recurring Terms Bonterra uses the following frequently recurring terms in this MD&A: WTI refers to West Texas Intermediate a grade of light sweet crude oil used as benchmark pricing in the United States, MSW Stream Index refers to the mixed sweet blend that is the benchmark price for conventionally produced light sweet crude oil in Western Canada, bbl refers to barrel, NGL refers to Natural gas liquids, MCF refers to thousand cubic feet, MMBTU refers to million British Thermal Units and BOE refers to barrels of oil equivalent. Disclosure provided herein in respect of a BOE may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 MCF: 1 bbl is based on an energy conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Numerical Amounts The reporting and the functional currency of the Company is the Canadian dollar. 5 P age

6 Quarterly Comparisons As at and for the periods ended ($ 000s except $ per share) Financial Revenue oil and gas sales Q3 78,946 Q2 79,344 Q1 (1) 66,468 Q4 39,624 Q3 35,204 Q2 31,049 Q1 36,893 Cash flow from operations 43,953 41,445 40,726 21,460 16,440 14,727 21,698 Per share basic Per share diluted Payout ratio % 53% 72% 94% 105% 71% Cash dividends per share Net earnings 19,690 15,119 12,695 6,082 7,746 9,201 10,182 Per share basic Per share diluted Capital expenditures and acquisitions, net of dispositions 34,025 9,731 39,506 (2) 24,069 27,360 25,288 (3) 21,413 Total assets 1,002, ,067 1,016, , , , ,757 Working capital deficiency 43,681 26,824 31,519 29,876 49,808 42,082 57,889 Long term debt 147, , , , , ,747 75,543 Shareholders equity 671, , , , , , ,008 Operations Oil (barrels per day) 7,310 8,414 7,459 4,400 4,108 3,650 3,975 NGLs (barrels per day) Natural gas (MCF per day) 22,274 20,554 22,176 16,009 12,583 11,753 12,260 Total BOE per day 11,794 12,621 11,887 7,663 6,666 6,037 6,438 (1) Quarterly figures for Q1 include the results of Spartan Oil Corp. (Spartan), for the period of January 25, to March 31,. Production includes 65 days for Spartan and 90 days for Bonterra. (2) Includes the Spartan acquisition that closed on January 25, that included $10,000,000 of acquired cash that reduced capital expenditures from $49,506,000. (3) Includes an asset acquisition that closed on June 7, for $17,108, P age

7 2011 As at and for the periods ended ($ 000s except $ per share) Financial Revenue oil and gas sales Q4 42,818 Q3 36,535 Q2 44,754 Q1 38,170 Cash flow from operations 26,180 21,730 25,465 24,034 Per share basic Per share diluted Payout ratio 58% 69% 59% 58% Cash dividends per share Net earnings 6,067 9,384 14,533 13,624 Per share basic Per share diluted Capital expenditures and acquisitions, net of disposals 20,529 15,941 5,872 20,344 Total assets 364, , , ,000 Working capital deficiency 51,576 43,362 30,823 39,777 Long term debt 69,916 72,391 72,608 70,568 Shareholders equity 181, , , ,054 Operations Oil (barrels per day) 4,096 3,789 4,164 4,258 NGLs (barrels per day) Natural gas (MCF per day) 12,541 10,553 11,024 10,517 Total BOE per day 6,679 5,887 6,373 6,350 Business Environment and Sensitivities Bonterra s financial results are significantly influenced by fluctuations in commodity prices, including price differentials. The following table depicts selective market benchmark prices and foreign exchange rates in the last eight quarters to assist in understanding volatility in prices and foreign exchange rates that have impacted Bonterra s financial and operating performance. Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q Crude oil WTI (U.S.$/bbl) WTI to MSW Stream Index Differential (U.S.$/bbl) (1) (4.72) (3.67) (6.95) (3.32) (7.21) (10.12) (10.49) 1.43 Bonterra average realized price (Cdn$/bbl) Natural gas AECO (Cdn$/mcf) Bonterra average realized price (Cdn$/mcf) Foreign exchange Cdn$/U.S.$ (1) This differential accounts for the major difference between WTI and Bonterra s average realized price (before quality adjustments and foreign exchange). During, the price differentials between Bonterra s average realized price and WTI substantially increased, due in most part to reduced demand because of refinery outages, seasonal turnarounds and pipeline capacity constraints. In Q4 the differential began to narrow and in Q3 the differential tightened to an average of approximately $4.72 U.S.$/bbl for the quarter. However, subsequent to, there has been an increase in the price differential due to the continuing growth of light U.S. crude oil supply and refinery turnarounds reducing the demand for Canadian crude oil. Canadian markets will continue to face volatile price differentials until additional transportation options become available, including increased rail take away and 7 P age

8 pipeline initiatives such as Keystone XL in the United States, the TransCanada natural gas line to Ontario converting to an oil pipeline and the Northern Gateway pipeline in Canada. The following chart shows the Company s sensitivity to key commodity price variables. The sensitivity calculations are performed independently showing the effect of the change of one variable; with all other variables being held constant. Annualized sensitivity analysis on cash flow, as estimated for (1) Impact on cash flow Change ($) $000s $ per share (2) Realized crude oil price ($/bbl) , Realized natural gas price ($/mcf) (1) This analysis uses current royalty rates, annualized estimated average production of 12,000 BOE per day and no changes in working capital. (2) Based on annualized basic weighted average shares outstanding of 30,201,642. Business Overview, Strategy and Key Performance Drivers On January 25,, Bonterra acquired 100 percent of the issued and outstanding common shares of Spartan Oil Corp. (Spartan) pursuant to an arrangement agreement in which Spartan became a wholly owned subsidiary. Spartan was a public oil and gas company with properties in Alberta and Saskatchewan. Consideration for Spartan shares was voting common shares of Bonterra, which amounted to the issuance of 10,711,405 Bonterra shares valued at $502,258,000. The Spartan acquisition adds to Bonterra s sustainable, high netback production profile, company owned infrastructure and its high quality, multi year drilling inventory that is in excess of 10 years (assuming four wells per section). On March 1,, Spartan amalgamated with Bonterra. If Spartan had been acquired on January 1,, those assets for the first nine months of would have added total revenue (primarily oil and gas sales, net of royalties) of $79,427,000 and production of 4,548 BOE per day. The combined production for the Company for the full nine months would have been 12,508 BOE per day. In addition Spartan assets would have added operating and administrative expenses of $12,511,000 for the nine month period ended. Producing assets acquired in the Spartan acquisition are approximately 81 percent crude oil and natural gas liquids. The Company incurred expenditures of $95,676,000, before dispositions, related to its capital program for the first nine months of, of which $34,033,000 was incurred in the third quarter. Operational success is dependent upon several factors, including but not limited to, the price of energy commodity products, efficiently managing capital spending, its ability to maintain desired levels of production, control over its infrastructure, its efficiency in developing and operating properties and its ability to control costs. The Company s key measures of performance with respect to these drivers include, but are not limited to, average production per day, average realized prices and average operating costs per unit of production. Disclosure of these key performance measures can be found in the MD&A and/or previous interim or annual MD&A disclosures. Drilling Three months ended Nine months ended ($000s) June 30, Gross (1) Net (2) Gross (1) Net (2) Gross (1) Net (2) Gross (1) Net (2) Gross (1) Net (2) Crude oil horizontal operated Crude oil horizontal non operated Total Success rate 100% 100% 100% 100% 100% (1) Gross wells means the number of wells in which Bonterra has a working interest. (2) Net wells means the aggregate number of wells obtained by multiplying each gross well by Bonterra s percentage of working interest. 8 P age

9 During the first nine months of, the Company placed three gross (3.0 net) wells on production that were drilled in the later part of and drilled 24 gross (23.8 net) wells in the first nine months of. Only two gross (2.0 net) wells were not placed on production by the end of the third quarter. In addition, 12 gross (2.7 net) non operated wells were drilled and placed on production during. Production Three months ended June 30, Nine months ended Crude oil (barrels per day) 7,310 8,414 4,108 7,727 3,912 NGLs (barrels per day) Natural gas (MCF per day) 22,274 20,554 12,583 21,668 12,200 Average BOE per day (1) 11,794 12,621 6,666 12,100 6,381 (1) In the first nine months of, average daily production included 273 days of Bonterra production and 249 days of Spartan production. Production volumes during the first nine months of increased to 12,100 BOE per day compared to 6,381 BOE per day, an increase of 90 percent over the same period in. The increase in production is primarily due to the Spartan acquisition and the Company s drilling program in the Pembina and Willesden Green areas. Production volumes for Q3 decreased by seven percent compared to Q2, which was primarily due to natural declines from flush production on wells drilled in the first quarter, pipeline apportionments, down time from plant turnarounds and other facility maintenance programs, which are commonly conducted during the third quarter that caused 220 BOE per day to be shut in or stored in field inventory. These production volumes are in line with the Company s guidance numbers. Cash Netback The following table illustrates the calculation of the Company s cash netback from operations for the periods ended: Three months ended Nine months ended $ per BOE June 30, Production volumes (BOE) 1,085,030 1,148, ,296 3,303,363 1,748,473 Gross production revenue $72.76 $69.08 $57.40 $68.04 $58.99 Royalties (1) (9.44) (10.21) (4.34) (8.71) (5.89) Field operating costs (14.71) (11.44) (16.59) (13.00) (16.01) Field netback $48.61 $47.43 $36.47 $46.33 $37.09 General and administrative (2) (2.65) (1.71) (2.50) (2.52) (2.55) Interest and other (2.76) (2.20) (1.56) (2.27) (1.61) Cash netback $43.20 $43.52 $32.41 $41.54 $32.93 The following non recurring items, combined to reduce funds flow in by $4,331,000: (1) Includes non recurring royalties of $0.92 per BOE for the three months ended, $1.74 for the three months ended June 30, and $0.91 per BOE for the nine months ended due to prior period royalties not paid by Spartan. (2) Includes non recurring general and administrative expenses of $0.31 per BOE for the three months ended and $0.40 per BOE for the nine months ended due to the Spartan acquisition. Cash netbacks have increased for the first nine months of compared to primarily due to higher realized commodity prices and lower operating costs. Quarter over quarter cash netbacks decreased due to an increase in field operating and general and administration costs, offset by an increase in realized commodity prices. 9 P age

10 Oil and Gas sales Three months ended Nine months ended ($ 000s) June 30, Revenue oil and gas sales 78,946 79,344 35, , ,146 Average Realized Prices ($): Crude oil (per barrel) NGLs (per barrel) Natural gas (per MCF) Average (per BOE) Revenue from oil and gas sales increased by $121,612,000 in the first nine months of or 118 percent compared to the comparable nine month period in. This increase was primarily due to an 89 percent increase in production due to the Spartan acquisition and the successful results of Bonterra s drilling program. Average realized price per BOE increased in compared to the same period a year ago, due to higher realized prices received for crude oil and natural gas. The quarter over quarter oil and gas revenues remained flat due to decreased production, lower realized prices for natural gas, offset by higher realized prices for crude oil and NGLs. The Company s product split on a revenue basis for is approximately 90 percent weighted towards crude oil and NGLs. This ratio will likely remain similar or increase as the Company continues to develop its Cardium (mainly oil) properties. Royalties ($ 000s) Three months ended June 30, Nine months ended Crown royalties 4,598 4,903 1,942 13,485 7,291 Freehold, gross overriding and other royalties 5,639 6, ,284 3,016 Total royalties 10,237 11,727 2,662 28,769 10,307 Crown royalties percentage of revenue Freehold, gross overriding and other royalties percentage of revenue Royalties percentage of revenue Royalties $ per BOE Royalties paid by the Company consist of Crown royalties paid to the Provinces of Alberta, Saskatchewan and British Columbia. The Company s average Crown royalty rate is approximately 6.0 percent for the first nine months of compared to 7.1 percent for the comparable period in. The decrease is primarily due to a lower ratio of crown versus freehold wells acquired from Spartan and horizontal Cardium wells that are still eligible for the initial five percent royalty rate until accumulated production thresholds are met or the expiry of time allowed to reach the threshold levels. A significant portion of those initial five percent royalty rate wells are from wells recently drilled. Non crown royalties increased for the first nine months of compared to the same period in primarily due to additional oil and gas revenue from wells subject to non crown royalties from the Spartan acquisition and recent non operated wells drilled in the Tomahawk area. The percent decrease in non crown royalties quarter over quarter is primarily due to a negative $2,000,000 freehold royalty adjustment for prior periods in the second 10 P age

11 quarter of, compared to a negative $1,000,000 gross overriding royalty adjustment in the third quarter of, both relating to Spartan acquired wells. Production Costs Three months ended Nine months ended ($ 000s except $ per BOE) June 30, Production costs 15,963 13,144 10,178 42,933 28,001 $ per BOE On a BOE basis, production costs have decreased by 19 percent during the nine month period. Total production costs for the nine months ended increased 53 percent from the comparable period in due to the 90 percent increase in production volumes over the same time period. The decrease on a BOE basis is primarily due to production from the recently drilled horizontal wells which have lower operating costs per BOE, due to higher production volumes over the same fixed costs. In addition, the Company has access to a wholly owned gas plant facility that has lower compression, gathering and processing costs. These factors have significantly reduced combined operating costs on a BOE basis. Quarter over quarter operating costs on a BOE basis have increased 29 percent primarily due to additional costs scheduled during the third quarter for facility start up and turnaround costs, in addition to third party equalizations. These scheduled seasonal facility costs in conjunction with natural production declines increased the production costs on a BOE basis. With a full quarter of production from wells drilled and tied in from the third quarter and new production from wells scheduled to be completed in the fourth quarter, the Company expects to reduce its production costs on a BOE basis in Q4. The completed seasonal turnarounds and maintenance programs that have been completed in the third quarter will contribute to lower production costs on a BOE basis for the fourth quarter. Other Income Three months ended Nine months ended ($ 000s) June 30, Realized gain on investments 163 1, ,762 Gain on sale of property ,616 Administrative income (loss) (17) Investment income , ,748 During, the Company disposed of a portion of its investments for gross proceeds of $968,000 ( $3,058,000). The increase in carrying value of these publically traded securities is mainly due to increased share prices, partially offset by the investments sold in the period. The market value of the investments held by the Company is $5,924,000 at (December 31, $5,046,000). During, the Company sold a portion of its non core Southeast Saskatchewan property for cash proceeds of $2,406,000. At the time of disposition the Company had a carrying value of $1,373,000 for exploration and evaluation expenditures, $954,000 for property plant and equipment and $133,000 of decommissioning liabilities resulting in a gain on sale of $212,000. During, the Company disposed of a portion of its Central Alberta Redwater and Tomahawk properties for proceeds of $1,109,000 and $2,500,000 respectively. At the time of disposition, the properties had no carrying value which resulted in an accounting gain on sale equal to its proceeds. 11 P age

12 The Company receives a portion of its administrative income by way of management fees from related parties (see related party transactions). General and Administration (G&A) Expense ($ 000s except $ per BOE) Three months ended June 30, Nine months ended Employee compensation expense 1,702 1, ,583 3,099 Office and administration expense (recurring) ,406 1,366 2,540 1,959 1,535 6,989 4,465 Office and administration expense (non recurring) (1) 339 1,331 Total G&A expense 2,879 1,959 1,535 8,320 4,465 $ per BOE (recurring) $ per BOE (total) (1) Non recurring office and administration costs relates to the acquisition of Spartan. Total G&A expense increased to $8,320,000 for the nine months ended from $4,465,000 for the comparable period in. The increase in employee compensation expense of $1,484,000 for compared to a year ago is primarily due to the increased number of staff required to accommodate the increased activity from the Spartan acquisition and an increase in accrued bonuses, due to higher net earnings before income taxes. The quarter over quarter increase of $208,000 is due to an increase in the accrued bonus. The Company has a bonus plan in which the bonus pool consists of three percent of earnings before income taxes. The Company firmly believes that tying employee compensation (including the use of stock options) to the performance of the Company clearly aligns the interest of the employees to that of the shareholders. The increase in recurring office and administration expense for compared to, related to an increase in bank renewal fees due to a higher credit facility, additional computer software costs and an increase in the allowance for doubtful accounts. The quarter over quarter increase relates primarily to an increase in additional software costs, technical fees, bank charges and an increase in the allowance for doubtful accounts for the third quarter. Finance Costs Three months ended Nine months ended ($ 000s except $ per BOE) June 30, Interest on long term debt 1,355 1, ,833 2,114 Other interest ,054 Interest expense 1,616 2,130 1,084 5,530 3,168 $ per BOE Unwinding of the discounted value of decommissioning liabilities Total finance costs 1,900 2,408 1,311 6,334 3,830 Interest on long term debt increased $2,719,000 in compared to the same period a year ago as the Company increased the bank debt by $64,632,000 from the end of the second quarter of to the end of the second quarter of. The increase was due to increased spending in the capital drilling program in the second half of 12 P age

13 and into the first quarter of and a $20,000,000 repayment of a short term related party loan. The Company also experienced higher interest rates on its credit facilities in the first and second quarters of. Interest rates are determined by net debt to cash flow ratios on a trailing quarterly basis. With the increased cash flow in the first nine months of the year from the Spartan acquisition and the $27,603,000 raised from the equity issuance on July 2, (see Shareholders Equity section), the Company experienced lower interest rates in the third quarter of. Other interest relates to amounts paid to related parties (see related party transactions) and a $25,000,000 subordinated promissory note from a private investor. From a sensitivity perspective on the estimated loan amounts, a one percent increase (decrease) in the Canadian prime rate would decrease (increase) both annual net earnings and comprehensive income by $1,194,000. Share based Payments ($ 000s) Three months ended June 30, Nine months ended 1,055 1,135 1,040 3,382 2,977 Share based payments are a statistically calculated value representing the estimated expense of issuing employee stock options. The Company records a compensation expense over the vesting period based on the fair value of options granted to employees, directors and consultants. Based on currently outstanding options, the Company anticipates that an expense of approximately $767,000 will be recorded for the remainder of, $1,014,000 for 2014, $356,000 for 2015 and $44,000 for For more information about options issued and outstanding, refer to Note 12 of the condensed financial statements. Depletion and Depreciation, Exploration and Evaluation and Goodwill Three months ended Nine months ended ($ 000s) June 30, Depletion and depreciation 18,929 28,582 8,010 67,072 22,936 Exploration and evaluation expense Provision for depletion and depreciation increased by $44,136,000 for the first nine months of compared to. The increase in depletion and depreciation was mainly the result of increased production volumes and increased property, plant and equipment costs from the Spartan acquisition. The quarter over quarter decrease was primarily due to lower production levels, a reduction in the decommissioning liabilities and additional developed reserves for wells that came on production late in the quarter. Exploration and evaluation expense related to expired leases. With the Spartan business combination, Bonterra also recorded goodwill. Goodwill has been allocated to the primary cash generating unit that consists of the Pembina and Willesden Green Cardium assets in Alberta, Canada. There were no impairment provisions recorded for the three or nine month period ended. Taxes The Company recorded a deferred tax expense of $19,160,000 for ( $9,249,000). The 13 P age

14 deferred tax expense increase in compared to is primarily related to increased earnings before income taxes. At, the Company has $578,355,000 of tax pools, which may be used to reduce taxable income in future years, limited to various rates of utilization. The Company also has $27,670,000 (December 31, $27,670,000) remaining of investment tax credits that expire between the years 2018 to In addition, the Company has $134,938,000 (December 31, $135,502,000) of capital loss carry forwards which can only be claimed against taxable capital gains. For additional information regarding income taxes, see Note 8 of the condensed financial statements. Net Earnings Three months ended Nine months ended ($ 000s except $ per share) June 30, Net earnings 19,690 15,119 7,746 47,504 27,129 $ per share basic $ per share diluted Net earnings in the first nine months of increased by $20,375,000 or 75 percent from the comparable period of. Increased net earnings resulted primarily from increased oil and gas production volumes and prices per BOE. This increase was partially offset by an increase in depletion and depreciation, deferred tax expense, production costs and royalty expenditures. The increase in net earnings for Q3 compared to Q2 also resulted from increased oil and gas prices per BOE and a decrease in depletion and depreciation expense. This was partially offset by an increase in production costs and deferred tax expense. Other Comprehensive Income Other comprehensive income for consists of an unrealized gain before tax on investments (including investments in a related party) of $1,845,000 relating to an increase in the investments fair value ( unrealized gain of $894,000). The Company also disposed of a portion of these investments in for a realized gain before tax of $278,000 ( $1,762,000). Realized gains decrease other comprehensive income as these gains are transferred to net earnings. Other comprehensive income varies from net earnings by unrealized changes in the fair value of Bonterra s holdings of investments including the investment in related party, net of tax. Cash Flow from Operations Three months ended Nine months ended ($ 000s except $ per share) June 30, Cash flow from operations 43,953 41,445 16, ,124 52,865 $ per share basic $ per share diluted In, cash flow from operations increased by $73,259,000 compared to the same period a year ago. This was primarily due to increased production and lower production costs realized from the Spartan acquisition, which combined with higher commodity prices, resulted in increased field net backs. Quarter over quarter increase was primarily due to a positive change in non cash working capital, partially offset by lower field netbacks in addition to decreased production. 14 P age

15 Related Party Transactions Bonterra holds 1,034,523 (December 31, 1,034,523) common shares in Pine Cliff which represents less than one percent ownership in Pine Cliff s outstanding common shares. Pine Cliff s common shares have a fair market value as of of $1,159,000 (December 31, $910,000). Pine Cliff paid a management fee to the Company of $45,000 plus administrative costs ( $214,000 plus administrative costs from Pine Cliff and its subsidiary Geomark). Services provided by the Company include executive services, accounting services, oil and gas administration and office administration. All services performed are charged at estimated fair value. As at, the Company had an account receivable from Pine Cliff of $145,000 (December 31, $45,000). As at, the Company s CEO, Chairman of the Board and major shareholder has loaned the Company $12,000,000 (December 31, $12,000,000). The loan bears interest at Canadian chartered bank prime less 5/8 th of a percent and has no set repayment terms but is payable on demand. Security under the debenture is over all of the Company s assets and is subordinated to any and all claims in favour of the syndicate of senior lenders providing credit facilities to the Company. The loan can only be repaid should the Company have sufficient available borrowing limits under the Company s credit facility. Interest paid on this loan during was $213,000 ( $214,000). This loan results in a substantial benefit to Bonterra as the interest paid to the CEO by Bonterra is lower than bank interest. Liquidity and Capital Resources Net Debt to Cash Flow Bonterra continues to focus on managing its cash flow, capital expenditure ranges and dividend payments. Annualizing the first nine months of cash flow, the Company continues to meet its annual guidance range of 1 to 1 times to 1.5 to 1 times net debt to cash flow ratio with a ratio of 1.14 to 1 times. The Company anticipates the Spartan acquisition (see Note 4 to the condensed financial statements) and successful drilling program will continue to sustain future cash flows and shareholder dividends and continue to improve the debt to cash flow ratio. Working Capital Deficiency ($ 000s) December 31, Working capital deficiency 43,681 29,876 49,808 Long term bank debt 147, , ,779 Net debt 190, , ,587 Shareholders' equity 671, , ,839 Total 862, , ,426 Net Debt and Working Capital Net debt is a combination of long term bank debt and working capital. The increase in net debt from $178,587,000 at to $190,869,000 at is primarily attributable to the Company s increased capital spending in the second half of to the end of the third quarter of, while at the same time maintaining the dividends paid to shareholders. Working capital is calculated as current liabilities less current assets. The Company finances its working capital deficiency using cash flow from operations, its long term bank facility, share issuances, option exercises and sale of investments. 15 P age

16 On April 4,, the Company increased its Subordinated Promissory Note by an additional $10,000,000, for a total of $25,000,000 under the same terms and conditions. For more information see Note 10 of the September 30, condensed financial statements. During the third quarter of the Company completed a $27,603,000 equity issuance. These funds were used to temporarily reduce the outstanding bank debt, which also resulted in a reduction of the debt to cash flow ratio. With the Spartan transaction, the Company inherited a derivative financial instrument entered into by Spartan. The financial derivative is outstanding for the period January 1,, to December 31, for a total 273,750 barrels of oil (approximately 750 barrels of oil per day) at a fixed price of Cdn $90.00 per barrel. It is estimated that a 10 percent change in the forward crude oil prices would result in a $542,000 change in net earnings for the nine month period ended. On October 18,, the Company entered into a financial derivative for the period November 1, to December 31, for a total of 488,000 MMBTU of natural gas at NYMEX less $0.34 U.S. per MMBTU. Capital Expenditures During the nine month period ended, the Company incurred capital costs of $93,262,000 ( $56,953,000) net of proceeds of $2,406,000 on disposal of property, plant and equipment. The Company spent $95,676,000 primarily on the drilling of 24 gross (23.8 net) Pembina and Willesden Green Cardium operated horizontal wells and 12 (2.7 net) non operated wells, facilities and gathering systems during the first nine months of. Long term Debt Long term debt represents the outstanding draws from the Company s credit facilities as described in the notes to the interim condensed financial statements. As of, the Company has bank facilities consisting of a $220,000,000 (December 31, $160,000,000) syndicated revolving credit facility and a $30,000,000 (December 31, $20,000,000) non syndicated revolving credit facility, for total facilities of $250,000,000. Amounts drawn under these facilities at totaled $147,189,000 (December 31, $166,808,000). The interest rates on the outstanding debt as of were 4.0 percent and 3.5 percent on the Company s Canadian prime rate loans and Banker s Acceptances, respectively. The loan is revolving to April 24, 2014, with a maturity date of April 25, 2015 and is subject to annual review. The revolving credit facilities have no fixed terms of repayment. Advances drawn under the credit facilities are secured by a fixed and floating charge debenture over the assets of the Company. In the event the credit facilities are not extended or renewed, amounts drawn under the facility would be due and payable on the maturity date. The size of the committed credit facilities is based primarily on the value of the Company s producing petroleum and natural gas assets and related tangible assets as determined by the lenders. For more information see Note 11 of the condensed financial statements. Shareholders Equity The Company is authorized to issue an unlimited number of common shares without nominal or par value. The Company is authorized to issue an unlimited number of Class A redeemable Preferred Shares and an unlimited number of Class B Preferred Shares. There are currently no outstanding Class A redeemable Preferred Shares or Class B Preferred Shares. 16 P age

17 Issued and fully paid common shares Number Amount ($ 000s) Balance, December 31, 19,909, ,877 Acquisition 10,711, ,258 Share issuance 553,725 27,603 Share issue costs, net of tax ( 996) Issued pursuant to the Company share option plan 17, Transfer from contributed surplus to share capital 88 Balance, 31,192, ,591 The Company provides a stock option plan for its directors, officers, employees and consultants. Under the plan, the Company may grant options for up to 3,119,217 (December 31, 1,990,954) common shares. The exercise price of each option granted will not be lower than the market price of the common shares on the date of grant and the option s maximum term is three years. For additional information regarding options outstanding, see Note 12 of the condensed financial statements. On July 2,, the Company announced the closing of a bought deal financing of 553,725 common shares at a price of $49.85 per common share, for aggregate gross proceeds of $27,603,000. The Company incurred issue costs of $1,325,000 in respect of the financing. Dividend Policy For the nine month period ended, Bonterra paid dividends of $73,632,000 ($2.48 per share) compared to $46,205,000 ($2.34 per share) in the same period in. Bonterra s dividend policy is regularly monitored and is dependent upon production, commodity prices, funds from operations, debt levels and capital expenditures. With its large inventory of undrilled locations, Bonterra continues to be well positioned to provide its shareholders a combination of sustainable growth and meaningful dividend income. Bonterra s dividends to its shareholders are funded by cash flow from operating activities with the remaining cash flow directed towards capital spending and, where applicable, the repayment of debt. To the extent that the excess cash flow from operations after dividends is not sufficient to cover capital spending, the shortfall is funded by funds from the exercising of employee stock options, the sale of investments and by draw downs from Bonterra s credit facilities. Bonterra intends to provide dividends to shareholders that are sustainable to the Company considering its liquidity and its long term operational strategy. In addition, since the level of dividends is highly dependent upon cash flow generated from operations, which fluctuates significantly in relation to changes in financial and operational performance, commodity prices, interest and exchange rates and many other factors, future dividends cannot be assured. Bonterra s payout ratio based on cash flow was 58 percent for the nine months ended (87 percent for the nine months ended ). 17 P age