BANKERS PETROLEUM LTD.

Transcription

1 The following discussion is management s assessment and analysis of the results and financial condition of Bankers Petroleum Ltd. (the Company ) and should be read in conjunction with the accompanying unaudited consolidated financial statements for the three month period ended March 31, 2005 and related notes. The preparation of financial data is in accordance with Canadian generally accepted accounting principles and all figures are reported in United States dollars unless otherwise indicated. Additional information relating to the Company is available on SEDAR at For additional information, please refer to the Company s financial statements and accompanying notes and the Management Discussion and Analysis ( MD&A ) included in the Company s 2004 annual report. This report is prepared as of. Highlights Highlights for the period were: Average production during Q1, 2005 of 1,243 barrels of oil equivalent per day ( boepd ) Total production during Q1, 2005 of 111,854 boe May 2005 production estimated at 1,500 boepd Completion of a private placement in March 2005 raising gross proceeds of approximately $29,590,000 The continuation of a lease acquisition program resulting in the acquisition of approximately 240,000 net acres believed to be prospective for Bend group shale gas in the Palo Duro basin of Floyd, Motley and Briscoe counties in Texas, USA Albania crude oil sales at ARMO refinery of $2,822,523 Net loss for the three month period ended March 31, 2005 of $1,072,695 (2004: $42,482) or $0.00 per share (2004: $0.00 per share) Cautionary note This MD&A uses the term boe. BOEs may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Description of Business The Company was incorporated under the Business Corporations Act (Ontario). On June 25, 2004, the Company changed its name from Goldpark China Limited to Bankers Petroleum Ltd and continued to British Columbia. The Company is now incorporated under the British Columbia Business Corporations Act and its common shares are listed on the TSX Venture Exchange with the trading symbol BNK.

2 Description of Business (continued) In July 2004, Saxon International Energy Ltd. ( Saxon ), a wholly-owned subsidiary of the Company, completed a Petroleum Agreement with Albpetrol Sh.A. of Albania ( Albpetrol ), to evaluate and redevelop an oilfield in Albania (see Production and development projects below). In December 2004, the Company commenced a lease acquisition program in the Palo Duro Basin of Texas, USA (see Production and development projects below). Forward looking statements Certain statements in this MD&A constitute forward-looking statements. The words "anticipate", "continue", "estimate", "expect", "may", "will", "should", "believe" and similar expressions are intended to identify forward-looking statements. Such forward-looking statements, including but not limited to statements with respect to anticipated rates of production, the estimated costs and timing of the Company's planned work program and reserves determination involve known and unknown risks, uncertainties and other factors which may cause the actual rates of production, costs and results to be materially different from estimated rates of production, costs or results expressed or implied by such forward-looking statements. The Company believes the expectations reflected in these forward looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements should not be unduly relied upon. Factors that could cause actual results to differ materially from those anticipated in these forward-looking statements include, among others, uncertainties associated with estimating oil and natural gas reserves, competition for, among other things, capital, acquisitions of reserves, undeveloped lands and skilled personnel, risks related to international operations, general risks associated with petroleum operations, risks associated with equipment procurement and equipment failure, volatility in market prices for oil and natural gas. Although the Company has attempted to take into account important factors that could cause actual costs or results to differ materially, there may be other factors that cause costs of the Company's program or results not to be as anticipated, estimated or intended. Risks and uncertainties The Company is subject to a number of risk factors due to the nature of the resource business in which it is engaged, not the least of which are adverse movements in commodity prices, which are impossible to forecast. The Company seeks to counter this risk as far as possible by selecting exploration, production and development areas on the basis of their recognized geological, production and potential to host economic returns.

3 Risks and uncertainties (continued) Oil and gas prices have a direct impact on the Company s earnings and are subject to volatile price fluctuations. Price volatility results from a variety of factors, including global consumption and demand for oil and gas, international economic and political trends, fluctuations in the U.S. dollar and other currencies, interest rates, and inflation. While prices for oil and gas have increased significantly since the start of 2003, there is no assurance that this trend will continue or that current prices will sustain. For additional information on the risks and uncertainties the Company faces, please refer to the Annual MD&A. Production and development projects (a) Patos Marinza Project In July 2004, Saxon completed a Petroleum Agreement (the Petroleum Agreement ) with Albpetrol to evaluate and redevelop the Patos Marinza Oilfield under Albpetrol s existing license with the National Petroleum Agency of Albania ( NPA ). On July 20, 2004, Saxon took over from Albpetrol the operation of 28 wells, a disposal well, and associated equipment and facilities. The Patos Marinza Oilfield is one of the largest onshore oilfields in Europe. Saxon has up to 24 months to evaluate the field and propose a Plan of Development to Albpetrol and the NPA. To earn its ongoing rights under the Petroleum Agreement, Saxon had a minimum capital expenditure commitment during the evaluation period of $2 million to rehabilitate 12 existing wells plus a water disposal well. In June 2004, the Company placed $2 million in escrow to fund its minimum commitment under the Petroleum Agreement. As a result of satisfying the conditions under the Petroleum Agreement, the trust funds were released to Saxon, with the last $1 million released on March 17, The Petroleum Agreement includes the right to redevelop, produce and sell product from the existing oilfield utilizing the existing wells and infrastructure at no additional cost to the Company. The terms of the Petroleum Agreement include a 1% gross over-riding royalty as a production share, which increases up to 3% to 5% (sliding scale) after payout of funds expended by the Company. The Company is currently in the evaluation phase of the Petroleum Agreement. Following the completion of a Plan of Development and acceptance by NPA, Saxon will obtain a production license. The duration of the Company s license will be 25 years with an option to extend at Saxon s election with continued economic production.

4 Production and development projects (a) Patos Marinza Project (continued) As a result of the Petroleum Agreement, Saxon commenced operations in July 2004, is incurring operating expenses, is receiving revenues and has committed to purchasing equipment towards its program under the Petroleum Agreement. (b) Palo Duro Project The Company acquired the leases of approximately 190,000 net leased acres of land in the Palo Duro Basin of West Texas ( Palo Duro Project ) from an arms-length party (the Seller ). As at March 31, 2005, the Company had incurred costs of $6,079,622 relating to the Palo Duro Project and had another $734,968 of cash held in trust to be used exclusively for the Palo Duro Project. As of April 25, 2005, the Company has increased its net acreage position in the Palo Duro Basin to approximately 240,000 net leased acres. The Company is continuing to acquire additional acreage with the intention of having 250,000 to 300,000 net acres under lease. Aggregate consideration payable for the oil and gas interests held or currently in the process of being acquired is approximately $7,000,000, for lease bonus and acquisition costs. The Company continues to build its base of technical data and expects to commence its initial well drilling program during the third quarter of The Company s net revenue interest will be no lower than 75% on leases acquired under the current agreements. The Seller is entitled to participate for up to 1/16 th working interest in all wells drilled. A finder s fee of 400,000 common shares of the Company was paid to an independent third party in connection with the lease acquisitions. The Company has granted Tyner Resources Ltd. ( Tyner ) a right to an assignment of the Company s working interest in 10 sections (6,400 acres) of the leases acquired, at the Company s aggregate lease costs in respect of such sections. A supplemental agreement with Tyner has granted Tyner an option to acquire an additional 10 sections (6,400 acres), 5 of which have been selected by the Company and presented to Tyner. To exercise this option, Tyner must pay the aggregate leasing costs incurred by the Company and issue the Company a total of 150,000 shares of Tyner (worth at least CAD$0.80 per share). By September 1, 2005, the remaining 5 sections will be presented to Tyner. To exercise this option, Tyner must pay the aggregate leasing costs incurred by the Company and issue the Company a total of 20,000 shares of Tyner per section acquired (worth at least CAD$0.80 per share). If the option is exercised, Tyner will have an obligation to drill one well in the project area by December 31, Failure to do so will result in a penalty of $150,000 payable to the Company.

5 Discussion of operations and financial condition ` Q1 Q4 Q3 Q Income $ 2,822,523 $ 2,303,317 $ 1,729,632 $ - Expenses 3,895,218 2,975,164 1,592, ,337 Net income (loss) for the period (1,072,695) (671,847) 137,624 (640,337) Basic and diluted income (loss) per share $ (0.00) $ (0.00) $ 0.00 $ (0.00) Q1 Q4 Q3 Q Income $ - $ - $ - $ - Expenses 42,482 (6,454) 44,619 70,335 Net income (loss) for the period (42,482) 6,454 (44,619) (70,335) Basic and diluted income (loss) per share $ (0.00) $ 0.00 $ (0.00) $ (0.00) Net assets at March 31, 2005 were $49,815,746 compared with $20,625,736 at December 31, 2004, a difference of $29,190,010. The most significant assets at March 31, 2005 were investments of $24,800,040 (December 31, 2004: $830,800), property, plant and equipment of $14,351,811 (December 31, 2004: $4,826,853), cash and cash equivalents of $9,172,600 (December 31, 2004: $14,520,606), receivables of $2,188,568 (December 31, 2004: $1,191,539) and restricted cash of $734,968 (December 31, 2004: $1,144,000). In March 2005, the Company completed a private placement, raising gross proceeds of approximately CAD$35,650,000. The proceeds will be used for further land acquisition and technical development costs for the Palo Duro Project as well as for general working capital. From the proceeds, the Company purchased CAD$30,000,000 of fixed income guaranteed investment certificates ( GIC s ). The GIC s carry an interest rate of 2.5% per annum and mature on March 15, 2006, but can be redeemed at any time during the term. The translated amount at the balance sheet date was $24,800,040. The investment at December 31, 2004 consisted of an investment in Transeuro Energy Corporation ( Transeuro ). In March 2005, the Company sold its shares of Transeuro for proceeds of $963,100, resulting in a gain of $131,710.

6 Discussion of operations and financial condition (continued) Property, plant and equipment increased by $9,524,958 between December 31, 2004 and March 31, The majority of the increase consisted of an in increase in land acquisition costs relating to the Palo Duro project of $5,115,099, from $964,523 at December 31, 2004 to $6,079,622 at March 31, Well facilities and infrastructure at the Patos Marinza Project increased by $3,511,515, from $2,401,263 to $5,912,778, net of amortization and depletion costs of $361,491. Patos Marinza field inventory and vehicles and equipment increased by $883,644 and $19,402, respectively. Receivables increased by $997,029, with the majority of the receivables consisting of amounts due on sales to the ARMO refinery. The receivable from ARMO at March 31, 2005 was $1,923,116 (December 31, 2004: $1,144,176) which has subsequently been collected. Restricted cash decreased by $409,032. The decrease is a result of the last remaining $1,000,000 of restricted cash that was held in trust for the Patos Marinza Project being released to the Company in March 2005, and restricted cash exclusively used for the Palo Duro Project increasing by $590,968, from $144,000 at December 31, 2004 to $734,968 at March 31, Cash flow analysis Cash and cash equivalents decreased by $5,348,006 between December 31, 2004 and March 31, The most significant items contributing to the decrease were the purchase of the GIC s for $24,923,730, the purchase of property, plant and equipment of $9,817,601 and net cash used in operations of $1,878,166. This was partially offset by net proceeds on the March 2005 private placement of $28,031,620, proceeds on the exercise of warrants, options and compensation options of $1,547,739 and the proceeds of $963,100 from the sale of the investment in Transeuro Energy Corporation. Liquidity and capital resources As at March 31, 2005, the Company had working capital of $34,728,967 (December 31, 2004: $14,755,537) after giving effect to the $734,968 of restricted cash. This is sufficient to cover ongoing obligations as they come due. Selected quarterly information On July 20, 2004, Saxon commenced operations and production with the take over of 28 wells from Albpetrol under the Petroleum Agreement. Immediate production of some 700 boepd was taken over. Average production for Q1, 2005 was 1,243 boepd and for April 2005, average production increased to 1,473 boepd. By April 30, 2005, the active well count was 40 wells with an average production of approximately 40 boepd per well. 10 other wells were down waiting on servicing with an additional 5 wells waiting to be recompleted.

7 Selected quarterly information (continued) Income in Q1, 2005, Q4, 2004 and Q3, 2004 consisted of petroleum sales of $2,822,523, $2,303,317 and $1,729,632, foreign exchange gains of $Nil, $120,322 and $41,574 and interest income of $63,040, $39,955 and $3,177, respectively. In Q1, 2005, the Company also had a gain on sale of investment of $131,710 from the sale of its Transeuro shares. Sales and Transportation costs of $559,896, $410,751 and $234,838 were incurred in Q1, 2005, Q4 and Q3, 2004 respectively. This is mainly from the costs of diluent addition and sales oil trucking to the ARMO refinery. Note that a majority of the diluent cost is recovered upon the sale of blend oil (crude oil production plus diluent) and is reflected in the revenue stream. No difficulties were encountered through the transportation and sale of crude oil to the ARMO refinery. Operating costs from Albanian operations for Q1, 2005, Q4 and Q3, 2004 were $1,670,897, $1,264,238 and $664,698, respectively. The largest component of operating costs is well servicing and energy (propane and diesel) costs. It is projected that operating costs will improve as production increases, lowering per unit fixed operating costs and as the team moves up the learning curve and well production stabilizes through an initial sand clean up and optimization stage, which typically takes 90 to 120 days to achieve. General and administrative costs from Albanian operations for Q1, 2005, Q4 and Q3, 2004 were $611,050, $547,156 and $572,374, respectively, including depletion and amortization of $287,941 in Q1, 2005 and $83,649 in Q4, 2004 (Q3, 2004: $Nil). This is in line with budgets and the early start up costs that were incurred. These costs are not expected to rise significantly with increased activities and production in Royalty costs, under the terms of the Petroleum Agreement, for Q1, 2005, Q4 and Q3, 2004 were $212,548, $111,781 and $25,805, respectively. General and administrative costs at the parent level were $432,250, $699,350 and $294,120 for Q1, 2005, Q4 and Q3, 2004, respectively. The most significant expenses were business development costs of $126,774, $285,861 and $46,109, legal fees of $95,609, $132,299 and $43,607, consulting fees of $85,929, $55,529 and $45,551 and travel and accommodation expenses of $17,147, $116,779 and $20,620, respectively.

8 Selected quarterly information (continued) The Company recorded stock-based compensation of $363,346, $18,079 and $310,922 in Q1, 2005, Q4 and Q3, 2004, respectively, relating to stock options granted in 2004 and The Company also incurred a foreign exchange loss of $340,090 in Q1, 2005, with the majority of this loss resulting from the translation of Canadian dollar denominated monetary assets. The most significant expenses in Q2, 2004 were a loss on sale of Grand Tech of $181,955 and stock-based compensation of $261,997. The proceeds from the Grand Tech sale were $2 million in cash and assumption by the purchaser of $339,589 of the Company s debt. The loss on sale of Grand Tech was $181,955 after giving effect to the net assets of Grand Tech of $2,465,734 at the time of sale and disposal costs of $55,810. The stock-based compensation was the fair value attributed to the stock options granted during the quarter ended June 30, Outstanding share data Authorized Unlimited number of common shares with no par value Issued and Fully Paid Common Shares Number of shares Amount Balance, December 31, ,295,739 $ 20,956,255 Shares issued pursuant to private placement 31,000,000 29,588,466 Share issuance costs - (1,556,846) Exercise of warrants and stock options 4,433,000 1,326,058 Exercise of compensation options 464, ,202 Finder's fee 400, ,000 Balance, March 31, ,592,785 $ 50,955,135 On March 10, 2005, the Company completed a brokered private placement of 31,000,000 common shares at $1.15 per share and raised gross proceeds of CAD$35,650,000. Share issuance costs associated with this private placement were $1,556,846 including a cash commission paid to the broker of $1,479,423. There were 559,500 common shares held in escrow at March 31, 2005 and there were no changes in escrowed shares to the date of this report. As at, the Company had 324,610,285 common shares outstanding.

9 Outstanding share data (continued) Stock options, warrants and compensation options The following tables summarize information about the stock options, warrants and compensation options outstanding as at March 31, 2005: Weighted Remaining Outstanding Exercisable Average Contractual Options Options Exercise Price Expiry date Life 6,550,000 5,883,333 $ 0.22 June 4, years 500, , August 4, years 350, , August 24, years 100, September 1, years 2,500, , February 10, years 10,000,000 7,391,669 Warrants outstanding & exercisable Exercise price Expiry date 11,667,000 $ 0.40 August 19, ,600, November 10, ,267,205 Compensation options outstanding & exercisable Exercise price Expiry date 1,392,136 $ 0.55 November 10, 2006 As at May 25, 2005, the Company had 12,925,000 stock options, 26,310,955 warrants and 784,636 compensation options outstanding.

10 Related party transactions During the three month period ended March 31, 2005, the Company incurred the following expenses with companies related by way of directors and/or officers in common: Legal fees $ 57,191 $ - Oil well servicing 796,472 - At March 31, 2005, included in accounts payable and accrued liabilities are the following amounts which are payable to companies related by way of directors and/or officers in common: Legal fees $ 57,467 $ - Oil well servicing 324,125 - These transactions, occurring in the normal course of operations, are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. Contractual obligation The Company has a contractual obligation pertaining to the Palo Duro Project. The Company has agreed to drill or cause to be drilled, 4 wells to test the Lower Penn Shale. The first well is required to be commenced on or before December 31, 2005, and thereafter each subsequent well is required to be commenced within 60 days after the release of the rig from the previous well. There is a penalty of $150,000 per well for any failure to perform these obligations. The Company has offset some of this requirement through the Tyner agreements (as noted in the Palo Duro Project section above), in which wells drilled by Tyner will count towards this 4-well obligation. Off-balance sheet arrangements The Company has no off-balance sheet arrangements.

11 Subsequent events a) Subsequent to March 31, 2005, 150,000 stock options, 1,260,000 share purchase warrants and 607,500 compensation options have been exercised for total proceeds of approximately $652,600. b) On April 14, 2005 the Company granted a total of 425,000 stock options to employees at a price of CAD$1.47 for a period of five years. The options are subject to a vesting schedule. c) On May 26, 2005, the Company granted a total of 2,650,000 stock options to officers, directors, employees and consultants at a price of CAD$1.15 for a period of five years. The options are subject to a vesting schedule. Outlook The Company is continuing to develop its Albanian operations. The 2005 year end budget has been revised to 3,500 boepd to account for the longer sand clean up and optimisation time expected to be between 90 to 120 days and the shortage of well servicing equipment. A second double service rig is anticipated to be mobilized in Q3, 2005 to mitigate this. The Company is continuing its Palo Duro land acquisition program, including acquiring seismic data and gathering the necessary information to prepare for commencement of drilling in October The Company is also looking at similar development opportunities in Albania and other countries involving large existing fields, in addition to reviewing exploration targets in the oil and gas sector with significant production and development potential. At present, the Company has sufficient cash resources to settle its liabilities.