Cona Resources Ltd. (formerly Northern Blizzard Resources Inc.) Condensed Consolidated Interim Financial Statements For the Three and Six Months

Transcription

1 Cona Resources Ltd. (formerly Northern Blizzard Resources Inc.) Condensed Consolidated Interim Financial Statements (Unaudited)

2 CONDENSED CONSOLIDATED INTERIM STATEMENT OF FINANCIAL POSITION In Canadian $000s (unaudited) As at, 2017 December 31, 2016 Assets Current Cash 12, ,074 Accounts receivable 37,275 41,687 Inventory 2,057 1,588 Financial derivative asset (Note 18) 10,202 4,773 Prepaid expenses and deposits 1,458 1,151 Total current assets 63, ,273 Financial derivative asset (Note 18) 1,501 - Property, plant and equipment (Note 5) 1,251,361 1,284,509 Intangible assets (Note 6) 10,607 11,171 Total assets 1,327,308 1,475,953 Liabilities Current Accounts payable and accrued liabilities 53,091 49,912 Dividends payable (Note 12) 2,020 2,470 Senior Notes (Note 9) 349,497 - Share-based compensation liability (Notes 12 and 16) Financial derivative liability (Note 18) 4,538 26,851 Current portion of onerous contract provision (Note 11) Total current liabilities 410,009 80,160 Senior Notes (Note 9) - 366,144 Share-based compensation liability (Notes 12 and 16) - 1,545 Financial derivative liability (Note 18) 2,333 30,856 Decommissioning provision (Note 10) 190, ,150 Onerous contract provision (Note 11) 3,308 4,545 Deferred tax liability 11,553 5,338 Total liabilities 617, ,738 Equity Share capital (Note 12) 1,043,330 1,130,820 Contributed surplus (Note 12) 13,908 15,964 Deficit (347,400) (362,569) Total equity 709, ,215 Total liabilities and equity 1,327,308 1,475,953 Subsequent Events (Notes 2, 7, 8, 9, 12 and 18) See accompanying notes to the condensed consolidated interim financial statements. Cona Resources Ltd Financial Statements

3 CONDENSED CONSOLIDATED INTERIM STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) In Canadian $000s, except per share amounts (unaudited) Three months ended Six months ended Revenues and other income Oil and natural gas sales 93,110 81, , ,637 Royalties (7,943) (7,072) (15,159) (10,121) 85,167 74, , ,516 Gain (loss) on financial derivative contracts (Notes 13 and 18) 24,546 (74,242) 56,229 (44,842) Other income , ,388 83,851 Expenses Production and operating 29,628 27,269 53,692 52,555 Blending, transportation and other expenses 24,296 22,580 51,618 43,532 General and administrative 7,697 4,631 11,337 12,268 Loss on Senior Notes (Note 9) 3,631-3,631 - Finance costs (Note 14) 8,281 7,828 15,909 16,198 Foreign exchange gain (Note 15) (8,088) (1,840) (11,197) (24,001) Share-based compensation (Note 16) 9,924 3,383 11,306 6,472 Depletion, depreciation and amortization (Notes 5 and 6) 27,706 32,010 55,091 65,878 Onerous contract provision (Note 11) ,204 95, , ,902 Income (loss) before taxation 6,540 (95,056) 33,954 (89,051) Deferred income tax expense (recovery) (313) (26,029) 6,215 (30,144) Income (loss) and comprehensive income (loss) 6,853 (69,027) 27,739 (58,907) Income (loss) per share (Note 17) Basic 0.07 (0.59) 0.26 (0.51) Diluted 0.06 (0.59) 0.25 (0.51) See accompanying notes to the condensed consolidated interim financial statements. Cona Resources Ltd Financial Statements

4 CONDENSED CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY In Canadian $000s (unaudited) Share Capital Contributed Surplus Deficit Total Equity Balance, December 31, ,083,548 15,094 (111,959) 986,683 Share-based compensation (Note 16) - 4,664-4,664 Shares purchased for Incentive Plan (Notes 12 and 16) (1,299) - - (1,299) Incentive Plan Awards settled (Note 16) 302 (302) - - Shares issued pursuant to the stock dividend program (Note 12) 20, ,394 Dividends declared (Note 12) - - (27,820) (27,820) Net loss and comprehensive loss - - (58,907) (58,907) Balance,, ,102,945 19,456 (198,686) 923,715 Balance, December 31, ,130,820 15,964 (362,569) 784,215 Issuer Bid cost of shares purchased (90,000) - - (90,000) Share-based compensation (Note 16) - 2,850-2,850 Shares purchased for Incentive Plan (Notes 12 and 16) (2,396) - - (2,396) Incentive Plan Awards settled (Note 12) 4,906 (4,906) - - Dividends declared (Note 12) - - (12,570) (12,570) Net income and comprehensive income ,739 27,739 Balance,, ,043,330 13,908 (347,400) 709,838 See accompanying notes to the condensed consolidated interim financial statements. Cona Resources Ltd Financial Statements

5 CONDENSED CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS In Canadian $000s (unaudited) Three months ended Six months ended Cash flow from (used in) operating activities Net income (loss) for the period 6,853 (69,027) 27,739 (58,907) Items not involving cash: Share-based compensation (Note 16) 9,924 3,383 11,306 6,472 Depletion, depreciation and amortization 27,706 32,010 55,091 65,878 Unrealized (gain) loss on financial derivative contracts (Notes 13 and 18) (24,984) 95,158 (57,766) 101,758 Unrealized foreign exchange gain (Note 15) (10,035) (1,932) (13,572) (25,483) Onerous contract provision (Note 11) Finance costs (Note 14) 1, ,486 1,189 Loss on Senior Notes (Note 9) 3,631-3,631 - Deferred income tax expense (recovery) (313) (26,029) 6,215 (30,144) Realized foreign exchange loss on purchase of Senior Notes (Note 9) 1,463-1,463 - Shares purchased for Incentive Plan (Notes 12 and 16) (2,033) (1,299) (2,396) (1,299) Incentive Plan Awards settled with cash (Note 16) (12,264) (39) (12,292) (105) Decommissioning costs incurred (Note 10) (172) - (626) (294) Onerous contract settlement costs incurred (Note 11) (227) - (443) - Changes in non-cash working capital (Note 19) 13,420 15,334 7,748 (8,045) 14,451 47,967 28,631 51,020 Cash flow from (used in) financing activities Increase (decrease) in bank loan (Note 7) - (5,854) - - Issuer Bid cost of shares purchased - - (90,000) - Purchase of Senior Notes (Note 9) (8,679) - (8,679) - Cash dividends paid (6,060) (3,581) (13,020) (7,219) Changes in non-cash working capital (Note 19) (14,675) (9,435) (111,635) (7,219) Cash flow from (used in) investing activities Property, plant and equipment expenditures (Note 5) (13,674) (7,524) (34,704) (14,446) Property dispositions (acquisitions) (Note 5) - (312) 210 (312) Changes in non-cash working capital (Note 19) (3,447) (239) (729) (4,750) (17,121) (8,075) (35,223) (19,508) Increase (decrease) in cash (17,345) 30,457 (118,227) 24,293 Cash, beginning of period 30, ,074 6,164 Cash, end of period 12,847 30,457 12,847 30,457 Other cash flow information Cash interest paid 823 1,570 14,233 16,356 See accompanying notes to the condensed consolidated interim financial statements. Cona Resources Ltd Financial Statements

6 1. Reporting Entity Cona Resources Ltd. ( Cona or the "Company"), formerly Northern Blizzard Resources Inc., is incorporated under the Business Corporations Act of Alberta and is engaged in the exploration for and the acquisition, development and production of petroleum and natural gas reserves in western Canada. The consolidated financial statements include the results of the Company and its wholly owned subsidiary, Alberta Inc., and Cona Resources Partnership. Effective July 12, 2017, the Company s name was changed to Cona Resources Ltd. from Northern Blizzard Resources Inc. and Company s stock symbol on the Toronto Stock Exchange was changed to CONA. The Company s head office is located at Suite 1900, Avenue SW, Calgary, Alberta, Canada, T2P 4K9. 2. Change of Control On May 11, 2017, Waterous Energy Fund ( WEF ), through its affiliates WEF GP (International) Ltd., the general partner of Waterous Energy Fund (International) L.P., and WEF GP (Canadian) Corp., the general partner of Waterous Energy Fund (Canadian) L.P., acquired the common shares of the Company held by NGP IX Northern Blizzard S.àr.l. ( NGP IX ) and R/C Canada Coöperatief U.A. ( R/C Canada ). The purchase represented approximately 67% of the Company s outstanding shares. The acquisition of the shares represented a change of control of the Company as defined in the documents noted below and triggered certain of their respective provisions: (i) Bank loan (Note 7): The credit agreement includes a provision that must be waived by the syndicate of banks in the event of a change of control. The Company received the waiver from the banking syndicate. (ii) Senior unsecured notes (Note 9): The indenture governing the senior unsecured notes dated January 29, 2014 (the Indenture ) includes a provision that if a change of control occurs, the Company must offer to purchase all outstanding 7.25% senior unsecured notes due 2022 ( Senior Notes ) at a price equal to 101% of the aggregate principal amount of the notes together with accrued and unpaid interest. On June 9, 2017, Cona announced a tender offer to purchase for cash any and all of its US$269,740,000 issued and outstanding Senior Notes. On July 31, 2017, Cona purchased US$262,228,000 principal of Senior Notes from holders that accepted the tender offer. The purchase of the Senior Notes was financed with a draw of $186,807,000 from Cona s existing credit facility (Note 7), a new $160,000,000 second lien term credit facility entered into for the purpose of financing the offer (Note 8) and cash on hand. After the July 31, 2017 purchase, US$7,512,000 principal of Senior Notes remains outstanding. The Indenture gives the Company the right to redeem the remaining Senior Notes if at least 90% of Senior Notes are purchased from the change of control offer. On July 31, 2017, the Company notified noteholders that the remaining Senior Notes will be redeemed on August 31, 2017 at a Cona Resources Ltd Financial Statements

7 price equal to 101% of the principal amount of the outstanding Senior Notes plus accrued and unpaid interest up to, but not including, August 31, (iii) Compensation award incentive plan (the Incentive Plan ) (Note 16): The Incentive Plan includes a provision that the awards outstanding under the Incentive Plan ( Awards ) become payable upon a change of control. The Company settled the value of the Awards that became payable with cash and common shares in May 2017 subsequent to the WEF acquisition. 3. Basis of Preparation Statement of compliance These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard ( IAS ) 34 Interim Financial Reporting, using the same accounting policies as those set out in Note 3 to the audited consolidated financial statements for the year ended December 31, The condensed consolidated interim financial statements contain disclosures that are supplemental to the Company s December 31, 2016 audited consolidated financial statements. Certain disclosures, which are normally required to be included in the notes to the annual audited consolidated financial statements, have been condensed or omitted. The condensed consolidated interim financial statements should be read in conjunction with the Company s audited consolidated financial statements and notes thereto for the year ended December 31, In the opinion of management, these condensed consolidated interim financial statements contain all adjustments necessary to present fairly the Company s financial position as at, 2017 and the results of its operations and cash flows for the three and six months then ended. The condensed consolidated interim financial statements were authorized for issue by the Board of Directors on August 11, Future Accounting Pronouncements In May 2014, the IASB issued IFRS 15 "Revenue from Contracts with Customers," which replaces IAS 18 "Revenue," IAS 11 "Construction Contracts," and related interpretations. The standard is required to be adopted either retrospectively or using a modified transition approach for fiscal years beginning on or after January 1, 2018, with earlier adoption permitted. The Company has reviewed the majority of its oil revenue sales contracts and is in the process of determining the extent of the impact, if any, that this standard will have on the consolidated financial statements In July 2014, the IASB finalized the remaining elements of IFRS 9 Financial Instruments, which includes new requirements for the classification and measurement of financial assets, amends the impairment model and outlines a new general hedge accounting standard. The mandatory effective date of IFRS 9 is for annual periods on or after January 1, 2018 and must be applied retrospectively with some exemptions. Early adoption is permitted. The Company does not anticipate material changes to the carrying values of the Company s financial instruments and is currently evaluating the impact of this standard on disclosures in the consolidated financial statements. In January 2016, the IASB issued IFRS 16 Leases, which replaces IAS 17 Leases. For lessees applying IFRS 16, a single recognition and measurement model for leases would apply, with required recognition of assets and liabilities for most leases. The standard will come into effect for annual periods beginning on or after January 1, 2019, with earlier adoption permitted if the entity is also applying IFRS 15 Cona Resources Ltd Financial Statements

8 Revenue from Contracts with Customers. The Company has identified a number of contracts that may be classified as leases and is evaluating the impact of the standard on the consolidated financial statements. There are no other standards and interpretations in issue but not yet adopted that are expected to have a material effect on the reported earnings or net assets of the Company. 5. Property, Plant and Equipment Cost Oil and natural gas properties and equipment Other fixed assets Total $ $ $ Balance, December 31, ,105,327 8,713 2,114,040 Additions 34, ,704 Dispositions (210) - (210) Change in decommissioning provision (Note 10) (14,310) - (14,310) Capitalized share-based compensation (Note 16) 1,364-1,364 Balance,, ,126,670 8,918 2,135,588 Accumulated Depletion and Depreciation Balance, December 31, 2016 (824,227) (5,304) (829,531) Depletion and depreciation (54,402) (294) (54,696) Balance,, 2017 (878,629) (5,598) (884,227) Carrying Amounts At December 31, ,281,100 3,409 1,284,509 At, ,248,041 3,320 1,251,361 (a) Depletion The calculation of depletion for the six months ended, 2017 takes into account the estimated future development costs required to bring the Company s estimated proved plus probable reserves on production of $793,645,000 (December 31, 2016 $827,096,000). For the six months ended, 2017, the Company capitalized $1,188,000 (2016 $421,000) of general and administrative expenses and $1,364,000 (2016 $232,000) of stock-based compensation, which are directly attributable to the development activities of the Company. Cona Resources Ltd Financial Statements

9 6. Intangible Assets Cost Other intangible E&E assets asset Total $ $ $ Balance, December 31, ,592 18,438 Capital expenditures Balance,, ,592 18,438 Accumulated Amortization Balance, December 31, (7,267) (7,267) Amortization - (564) (564) Balance,, (7,831) (7,831) Carrying Amounts At December 31, ,325 11,171 At, ,761 10, Bank Loan At, 2017, the Company had a credit facility totaling $285,000,000 (December 31, $285,000,000) with a syndicate of banks. The credit facility consists of a $250,000,000 revolving term syndicated facility and a $35,000,000 revolving term operating facility. At, 2017, there was no amount drawn on the credit facility (December 31, 2016 $nil). Subsequent to, 2017, $186,807,000 was drawn from the credit facility in order to fund a portion of the purchase of the Senior Notes pursuant to the tender offer made as a result of the change of control (Note 2). The revolving period, referred to above, is extendible annually by 364 days at the Company s request, subject to approval by each bank. If the credit facility is not renewed at the end of the revolving period, currently July 13, 2018, outstanding borrowings under the credit facility are converted to a one year term loan. At the beginning of each revolving period, the credit facility is effectively a two year arrangement. The credit facility is subject to semi-annual review and re-determination of the borrowing base by May 31 and October 31 of each year, or in the event of a material adverse effect. Any re-determination of the borrowing base is effective immediately, and if the borrowing base is reduced, the Company has 60 days to repay any shortfall. Borrowings under the credit facility, with the exception of letters of credit, bear interest at the agent bank s prime or U.S. base rate, Bankers Acceptance rate or LIBOR, plus applicable margins. The applicable margin charged is dependent on the Company s Senior debt to EBITDA ratio (as further described in the financial covenants below) determined quarterly. Cona Resources Ltd Financial Statements

10 The credit facility is secured by a $1,000,000,000 demand debenture granting a first priority security interest and a first fixed and floating charge over all assets of the Company and its subsidiaries. The two credit facility covenants at, 2017 were: (i) Senior debt to EBITDA ratio: Debt other than the Senior Notes and permitted refinancing debt (as defined in the credit agreement) shall not exceed 3.0 times trailing 12-month net income before non-cash items, income taxes, interest expense and non-recurring losses, adjusted for material acquisitions or dispositions as if they occurred on the first day of the calculation period; and (ii) Interest coverage ratio: Trailing 12-month net income before non-cash items, income taxes, interest expense and non-recurring losses, adjusted for material acquisitions or dispositions as if they occurred on the first day of the calculation period, shall not be less than 2.5 times the trailing 12-month cash interest expense. At, 2017, the Company was in compliance with the financial covenants. The Company had letters of credit in the amount of $545,000 outstanding at, 2017 (December 31, 2016 $485,000). The change of control (Note 2) triggered a provision that must be waived by the syndicate of banks for such an event. During the second quarter of 2017, the Company received the waiver from the banking syndicate. 8. Second Lien Term Loan On July 28, 2017, Cona entered into a second lien term loan ( Term Loan ) for $160,000,000. The Term Loan matures on July 28, 2020, and is repayable at par during the first year, 102.5% during the second year and 105% during the third year. Mandatory prepayments are required with the net cash proceeds from certain debt issuances and the net cash proceeds of asset sales in excess of $15,000,000 that are not reinvested within 75 days, which are subject to minimum liquidity requirements on the Company s credit facility. Interest is payable monthly in arrears at the Canadian Dollar Offered Rate ( CDOR ) plus 7.5% during the first year, and CDOR plus 10.0% thereafter. A duration fee of 1% is payable based on the outstanding amount of the Term Loan on January 29, The Term Loan has two financial covenants: (i) Minimum Asset Coverage Ratio: The ratio of the present value of proved developed producing reserves divided by the aggregate outstanding principal amount of the Term Loan plus funded credit facility debt shall be at least 0.95 times as of December 31, 2017 and 1.0 times as of June 30 and December 31 of each year thereafter. The present value of proved developed producing reserves is based on before tax cash flows using strip pricing, discounted at 10%, adjusted for hedges in place as of the calculation date; and (ii) Interest Coverage Ratio: Trailing 12-month net income before non-cash items, income taxes, interest expense and non-recurring losses, adjusted for material acquisitions or dispositions as if they occurred on the first day of the calculation period, shall not be less than 2.0 times the Cona Resources Ltd Financial Statements

11 9. Senior Notes trailing 12-month cash interest expense. The Interest Coverage Ratio is tested quarterly commencing December 31, As at, 2017 December 31, 2016 $ $ Senior Notes (1) 350, ,921 Tender offer provision (1) 3,502 - Unamortized debt issuance costs (4,208) (4,777) 349, ,144 Note: (1) As a result of the tender offer on June 9, 2017 (as discussed below), the Senior Notes were reclassified to current liabilities as at, 2017 and the liability was increased by 1%. This resulted in a loss on the Senior Notes of $3,502,000. At, 2017, the Company had US$269,740,000 of Senior Notes outstanding due February 1, The Senior Notes bear interest at 7.25% per annum, payable semi-annually in arrears on February 1 and August 1 of each year. The Senior Notes are unsecured and are jointly and severally guaranteed by each subsidiary of the Company that guarantees obligations under the bank credit facility. The Senior Notes are carried at amortized cost, net of debt issuance costs. The debt issuance costs accrete up to the principal balance at maturity using an effective interest rate of 7.56% per annum. The Senior Notes are redeemable at the Company s option after February 1 of each of the following years, in whole or in part, at the following redemption prices (expressed as a percentage of the principal amount of the notes): 2017 at %, 2018 at %, 2019 at % and 2020 and thereafter at 100%, plus accrued and unpaid interest on the notes, if any, to the redemption date in the case of each of the above circumstances. In April 2017, the Company purchased and cancelled US$6,510,000 of Senior Notes ($8,679,000). This transaction was completed in the open market. The Company recorded a loss of $129,000 related to this purchase. When combined with the increase to the liability as a result of the tender offer, this resulted in a loss on Senior Notes of $3,631,000. On June 9, 2017, Cona announced a tender offer to purchase for cash any and all of its issued and outstanding Senior Notes pursuant to the Indenture. According to the terms of the Indenture, the tender offer was made at a price equal to 101% of the aggregate principal amount of the Senior Notes together with accrued and unpaid interest. At, 2017, the Company had an obligation to purchase US$269,740,000 of Senior Notes outstanding for US$272,437,000. On July 31, 2017, Cona purchased US$262,228,000 principal of Senior Notes from holders that accepted the tender offer. The purchase of the Senior Notes was financed with a draw of $186,807,000 from the existing credit facility (Note 7), a $160,000,000 Term Loan (Note 8) and cash on hand. After the July 31, 2017 purchase, US$7,512,000 principal of Senior Notes remained outstanding. The Indenture gives the Company the right to redeem the remaining Senior Notes if at least 90% of Senior Notes are purchased as a result of the change of control offer. On July 31, 2017, the Company notified noteholders that the remaining Senior Notes will be redeemed on August 31, 2017 at a price equal to Cona Resources Ltd Financial Statements

12 101% of the principal amount of the outstanding Senior Notes plus accrued and unpaid interest up to, but not including, August 31, Amortization of debt issuance costs recorded and included in finance costs on the statement of operations for the three and six months ended, 2017 are $228,000 ( $234,000) and $462,000 (2016 $468,000) (Note 14). The fair value of Senior Notes outstanding at, 2017 was $353,705,000 (December 31, 2016 $361,648,000) as measured by the change of control tender offer price. 10. Decommissioning Provision The Company s decommissioning provision results from its ownership interest in oil and natural gas properties. Undiscounted future cash flows of approximately $360,055,000 (December 31, 2016 $334,572,000) are expected to be made over the next 50 years with the majority of costs to be incurred between 2019 and A weighted average risk free rate of 2.30% (December 31, %) and an inflation rate of 2.00% (December 31, %) per annum were used to calculate the present value of the decommissioning provision. $ Balance, December 31, ,150 Additions 2,105 Settlements (626) Changes in cost estimates (1,285) Changes in discount rates and inflation rates (15,079) Accretion (Note 14) 2,002 Balance,, , Onerous Contract Provision At, 2017, the Company recognized a total provision of $4,171,000 related to an onerous office lease contract (December 31, 2016 $4,545,000). The provision represents the present value of the difference between the minimum future lease payments the Company is obligated to make under the non-cancellable onerous operating lease contract and estimated sublease recoveries. This estimate may vary as a result of changes in estimated sublease recoveries. The onerous contract provision is estimated to be settled in periods up to and including the year $ Balance, December 31, ,545 Liability settlements (443) Changes in cost estimates 129 Change in discount rate (82) Accretion (Note 14) 22 Balance,, ,171 Current portion 863 Long-term portion 3,308 Cona Resources Ltd Financial Statements

13 12. Equity (a) Share Capital The authorized capital of the Company consists of an unlimited number of common shares and an unlimited number of preferred shares, issuable in series. No preferred shares have been issued by the Company as at, 2017 (December 31, 2016 nil). Common shares issued and outstanding were as follows: Number of Shares Amount ($000) Balance, December 31, ,505,757 1,121,298 Common share purchases Issuer Bid (22,500,000) (90,000) Shares outstanding at, ,005,757 1,031,298 Shares held in trust for Incentive Plan Prior years Shares acquired for Incentive Plan (897,000) (5,291) Dividends on shares held in trust for Incentive Plan (10,700) - Incentive Plan Awards settled with equity 811,283 14,813 Six months ended, 2017 Shares acquired for Incentive Plan (Note 16) (702,547) (2,396) Incentive Plan Awards settled with equity (Note 16) 798,964 4,906 Balance,, ,005,757 1,043,330 Shares purchased for the Incentive Plan are held in trust until Awards are settled (Note 16). At, 2017, the Company did not have any shares held in trust. On February 3, 2017, the Company completed an issuer bid pursuant to which the Company purchased and cancelled 22,500,000 of its common shares at a price of $4.00 per common share for a total cost of $90,000,000. Of the common shares purchased, 12,228,675 common shares were purchased from NGP IX and 8,318,887 common shares were purchased from R/C Canada. At the time of the issuer bid, NGP IX and R/C Canada were the Company s significant shareholders. (b) Dividends Dividends declared for the three and six months ended, 2017 totaled $6,060,000 ($0.06 per common share) and $12,570,000 ($0.12 per common share), respectively. At, 2017, the Company recorded dividends payable of $2,020,000, which were paid on July 17, On July 17, 2017, the Company declared a dividend of $0.02 per common share payable on August 15, 2017 to shareholders of record on July 31, On August 11, 2017, the Company suspended the monthly dividend effective immediately after the dividend payment on August 15, Cona Resources Ltd Financial Statements

14 (c) Contributed Surplus As at, 2017 $ Opening balance 15,964 Share-based compensation 2,850 Incentive Plan Awards settled with shares (4,906) Ending balance 13, Gain (Loss) on Financial Derivative Contracts Three months ended Six months ended $ $ $ $ Realized gain (loss) (438) 20,916 (1,537) 56,916 Unrealized gain (loss) 24,984 (95,158) 57,766 (101,758) Gain (loss) on financial derivative contracts 24,546 (74,242) 56,229 (44,842) 14. Finance Costs Three months ended Six months ended $ $ $ $ Interest expense 6,928 7,420 13,423 15,009 Amortization of debt issuance costs (Note 9) Accretion of decommissioning provision (Note 10) 1, , Accretion of onerous contract provision (Note 11) Finance costs 8,281 7,828 15,909 16, Foreign Exchange (Gain) Loss Three months ended Six months ended $ $ $ $ Realized loss (1) 1, ,375 1,482 Unrealized gain (10,035) (1,932) (13,572) (25,483) Foreign exchange gain (8,088) (1,840) (11,197) (24,001) Note: (1) Included in realized foreign exchange loss in the second quarter of 2017 was a $1,463,000 loss related to the purchase of US$6,510,000 Senior Notes in April Cona Resources Ltd Financial Statements

15 16. Share-based Compensation Three months ended Six months ended $ $ $ $ Total share-based compensation 11,725 3,318 13,920 6,468 Capitalized to property, plant and equipment (1,149) (119) (1,364) (232) Revaluation of share-based compensation liability (652) 184 (1,250) 236 Share-based compensation expense 9,924 3,383 11,306 6,472 (a) Incentive Plan (i) Description of Incentive Plan The Company has a compensation award incentive plan (the Incentive Plan ), which provides for time-based and performance share awards. Awards can be granted to directors, officers, employees, consultants and other service providers of the Company. The number of common shares reserved for issuance from time to time under the Incentive Plan shall not exceed 6.5% of the total common shares then outstanding. The value of Awards is adjusted to account for monthly dividends paid from the date of the grant to the applicable Award payment date. The Company has the option of settling the value of Awards that become payable in common shares, cash or a combination thereof. The payment schedule for Awards granted under the Incentive Plan and the multiplier for the performance share awards are determined by the Board of Directors at the time of grant. (ii) Accounting for Incentive Plan For the purposes of calculating share-based compensation, the fair value of the Awards is deemed to equal the fair value of the underlying shares on the date of grant and a performance multiplier of 1x is assumed for the performance awards. Share-based compensation expense related to the portion of Awards settled with common shares has a corresponding charge to contributed surplus (i.e. equity settled). The estimated withholding tax owing when the Awards are expected to be settled is recorded as a liability. The liability is revalued at the end of each reporting period with a corresponding charge to sharebased compensation expense (i.e. cash settled). An estimated forfeiture rate of 5% (December 31, %) was used when valuing all Awards granted during the six months ended, At 2017, the Company did not have any Awards outstanding. The weighted average fair value of Awards granted for the prior three years at December 31, 2016 was $8.77 per Award. Cona Resources Ltd Financial Statements

16 (iii) Awards issued and outstanding As at, 2017, Awards issued and outstanding were as follows: Time-based Share Awards Performance Share Awards Total Awards Balance, December 31, ,196,360 2,178,224 4,374,584 Granted 13,928 13,928 27,856 Dividend equivalents 60,760 60, ,406 Awards settled with shares (Note 12) (408,300) (390,664) (798,964) Awards settled with cash (1,818,780) (1,806,248) (3,625,028) Forfeited (43,968) (55,886) (99,854) Balance,, (iv) Common shares purchased for Incentive Plan Periodically, the Company purchases common shares in the open market to settle the after-tax portion of Awards that become payable. These common shares are held in trust by an independent trustee and are recorded as a reduction of share capital. Upon settlement of Awards, the respective common shares are released from trust to service providers. During the three and six months ended, 2017, 787,972 and 798,964 common shares, respectively, were distributed to settle outstanding Awards that became payable ( ,340 and 37,496 common shares, respectively) (Note 12). The Company did not have any common shares held in trust at, (v) Change of Control The change of control (Note 2) resulted in 4.4 million Awards becoming payable for total consideration of $14,896,000. The Awards were settled with a combination of cash ($12,247,000) and 781,327 common shares valued at $2,649,000 based on a 5 day volume weighted price at the time of the Award settlement. The common shares used for the settlement were purchased in the open market. 17. Income (loss) per Share Basic income (loss) per share is calculated as net income (loss) divided by the weighted average number of common shares outstanding. Cona Resources Ltd Financial Statements

17 Diluted income (loss) per share has been calculated as follows: Three months ended Six months ended $ $ Net income (loss) basic 6,853 (69,027) 27,739 (58,907) Revaluation of share-based compensation liability related to the Incentive Plan (Note 16) (477) 134 (915) 172 Net income (loss) diluted 6,376 (68,893) 26,824 (58,735) Weighted average common shares outstanding basic 100,744, ,717, ,929, ,461,605 Dilutive impact of Awards 2,448,583 3,631,881 3,408,609 3,708,822 Weighted average common shares outstanding diluted 103,193, ,349, ,337, ,170, Financial Instruments and Risk Management The carrying value is equal to the fair value for each category of the Company s financial instruments except for Senior Notes (Note 9). The estimated fair values of the financial instruments have been determined based on the Company s assessment of available market information. These estimates may not necessarily be indicative of the amounts that could be realized or settled in a market transaction. The fair values of financial instruments, other than the Senior Notes, are equal to their carrying amounts due to the short-term maturity of these instruments. The fair value of the Senior Notes is disclosed in Note 9. At, 2017, the Company s financial derivative contracts were classified as Level 2. For purposes of estimating the fair value of our financial derivative contracts, the Company utilizes estimates from third-party brokers. These broker estimates are corroborated with other sources and/or other observable market data utilizing assumptions that market participants would use when pricing the asset or liability. There have been no transfers between levels during the six months ended, Financial assets and liabilities are presented on a net basis if the Company has the legal right to offset and intends to either settle on a net basis or to realize the asset and settle the liability simultaneously. The Company offsets financial derivative assets and liabilities when the counterparty, currency and timing of settlement are the same. Cona Resources Ltd Financial Statements

18 The following table provides a summary of the Company s offsetting financial derivative positions:, 2017 December 31, 2016 As at Asset Liability Net Asset Liability Net Gross amount 13,371 (6,871) 6,500 4,773 (73,714) (68,941) Amount offset (1,668) - (1,668) - 16,007 16,007 Net amount recognized 11,703 (6,871) 4,832 4,773 (57,707) (52,934) Recognized on statement of financial position: Current 10,202 (4,538) 5,664 4,773 (26,851) (22,078) Long-term 1,501 (2,333) (832) - (30,856) (30,856) Net amount recognized 11,703 (6,871) 4,832 4,773 (57,707) (52,934) The Company s activities expose it to a variety of financial risks that arise as a result of its exploration, development, production and financing activities. These risks include credit risk, liquidity risk and market risk. There have been no significant changes in the Company s risk management policies or exposures during the six months ended, (a) Credit risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. This will arise principally from joint interest partners and oil and natural gas customers related to outstanding receivables and counterparties related to financial derivative contracts. On entering into any business contract, the extent to which the arrangement exposes the Company to credit risk is considered. The Company s policy to mitigate credit risk associated with these balances is to establish relationships with reputable counterparties, review the financial capacity of its counterparties and, in certain circumstances, the Company may seek enhanced credit protection from a counterparty or purchase accounts receivable insurance. Receivables from oil and natural gas sales are normally collected on the 25th day of the month following production. Joint operations receivables are typically collected within one to three months of the invoice being issued. The Company attempts to mitigate the risk from joint venture receivables by obtaining partner pre-approval of significant expenditures. However, the receivables are from participants in the oil and natural gas sector, and collection of the outstanding balances is dependent on industry factors such as commodity price fluctuations, escalating costs and the risk of unsuccessful drilling. In addition, further risk exists with partners, as disagreements occasionally arise that increase the potential for non-collection. The Company does not typically obtain collateral from joint venture partners; however, in certain circumstances, the Company does have the ability to withhold revenue from partners in the event of non-payment. Only a portion of the Company s operations are conducted jointly with others. The Company s maximum exposure to credit risk at, 2017 is in respect of accounts receivable, net of allowance for doubtful accounts, of $37,275,000 (December 31, $41,687,000) and financial derivative contracts of $11,703,000 (December 31, $4,773,000). The Company has purchased accounts receivable insurance related to a significant purchaser of oil that represents approximately 36% of the accounts receivable balance at, The policy s renewal date is Cona Resources Ltd Financial Statements

19 August 31, The Company has two external customers individually exceeding 10% of total oil and natural gas sales that accounted for approximately 68% of the Company s revenue for the six months ended, 2017 (66% for the year ended December 31, 2016) and 46% of accounts receivable at, 2017 (December 31, %). (b) Liquidity risk At, 2017, the Company had $284,455,000 (December 31, 2016 $284,515,000) available under its credit facility, after considering letters of credit outstanding (Note 7). The contractual maturities of financial liabilities are as follows: Payments Due by Period Total 1 year 2-3 years 4-5 years More than 5 years Accounts payable and accrued liabilities 53,091 53, Dividends payable 2,020 2, Financial derivative contracts 6,871 4,538 2, Senior Notes (1) 355, , Total 417, ,600 2, Note: (1) Amounts include future interest payments on the 7.25% Senior Notes. The Senior Notes were reclassified as a current liability as at, On July 31, 2017, Cona purchased US$262.2 million principal of Senior Notes and notified holders of the remaining Senior Notes that such Senior Notes will be redeemed on August 31, 2017 (Note 9). (c) Market risk Currency risk Northern American crude oil prices are denominated in US dollars. The Company is exposed to fluctuations in the CAD/USD foreign exchange ( CAD/USD ) rate as a result of crude oil sales. In addition, the Company has US dollar denominated debt and interest obligations and financial derivative contracts of which future cash repayments and settlements, respectively, are directly impacted by the exchange rate in effect on the repayment date. To manage the impact of currency exchange rate fluctuations, the Company may enter into agreements to fix the foreign exchange rate. The carrying amounts of the Company s US dollar denominated monetary assets and liabilities are as follows: As at, 2017 December 31, 2016 US$ US$ Assets 18,136 34,369 Liabilities (1) (282,425) (298,210) (264,289) (263,841) Cona Resources Ltd Financial Statements

20 Note: (1) After adjusting for the purchase of the Senior Notes, the US denominated monetary liabilities are $10.0 million. The following table summarizes the sensitivity of the fair value of the Company s foreign exchange derivative position as at, 2017 to fluctuations in commodity prices, with all other variables held constant. For the purposes of assessing the potential impact of CAD/USD changes, the Company has used a volatility measure of a one cent change in the exchange rate. Fluctuations in CAD/USD potentially could have resulted in unrealized gains (losses) impacting income after tax as follows: Decrease 10% Increase 10% $ $ Value of derivative position (146) 146 Foreign Exchange Contracts Outstanding at, 2017 Settlement Date Contract Monthly Notional Amount USD/CAD (1) Jul 28, 2017 Swap US$20.0 million Note: (1) Refers to the quoted CAD/USD foreign exchange rate exchange rate. In July 2017, the Company purchased a US$250.0 million call option for consideration of $2.1 million, with an exercise price of CAD/USD which settled on July 28, Interest rate risk As at, 2017, the Company had $nil (December 31, 2016 $nil) in bank loans outstanding subject to movements in floating interest rates. Commodity price risk The following table summarizes the sensitivity of the fair value of the Company s commodity derivative positions as at, 2017 to fluctuations in commodity prices, with all other variables held constant. For the purposes of assessing the potential impact of these commodity price changes, the Company has used a volatility measure of 10 percent. Fluctuations in commodity prices potentially could have resulted in unrealized gains (losses) impacting income after tax as follows: Decrease 10% Increase 10% $ $ Value of derivative positions 17,759 (16,929) Cona Resources Ltd Financial Statements

21 Commodity Contracts Outstanding at, 2017 Price Term Contract Index (1) Volume $/bbl Jan Dec 2017 Swap WTI 1,000 bbl/d CAD Jan Dec 2017 Swap WTI 1,000 bbl/d CAD Jan Dec 2017 Swap WTI 1,000 bbl/d CAD Jan Dec 2017 Swap WTI 2,000 bbl/d CAD Jan Dec 2017 Swap WTI 2,000 bbl/d CAD Jan Dec 2017 Swap WTI 1,000 bbl/d USD Jan Dec 2017 Swap WCS 1,000 bbl/d CAD (17.63) Jan Dec 2017 Swap WCS 1,000 bbl/d CAD (17.60) Jan Dec 2017 Swap WCS 6,000 bbl/d CAD (18.50) Jan Dec 2018 Swap WTI 1,000 bbl/d CAD Jan Dec 2018 Swap WTI 2,000 bbl/d CAD Jan Dec 2018 Swap WTI 2,000 bbl/d CAD Jan Dec 2018 Swap WTI 1,000 bbl/d USD Notes: (1) West Texas Intermediate ( WTI ) refers to the calendar monthly average based on the New York Mercantile Exchange prompt month. (2) Western Canadian Select ( WCS ) is a benchmark price for heavy oil and is typically quoted as a differential to WTI. 19. Supplemental Cash Flow Information Three months ended Six months ended $ $ Source (use) of cash: Accounts receivable 3,747 3,427 4,412 (6,331) Inventory 567 (852) (312) (667) Prepaid expenses and deposits (723) 121 (307) 278 Accounts payable and accrued liabilities 6,446 12,399 3,290 (6,075) 10,037 15,095 7,083 (12,795) Related to operating activities 13,420 15,334 7,748 (8,045) Related to financing activities Related to investing activities (3,447) (239) (729) (4,750) 10,037 15,095 7,083 (12,795) Cona Resources Ltd Financial Statements

22 20. Commitments As at, 2017, the Company is committed to the following non-cancellable payments: Total 1 year 2-3 years 4-5 years More than 5 years $ $ $ $ $ Operating leases office & other 17,727 3,254 6,070 6,111 2,292 Operating leases vehicles 1, Transportation commitments 5, ,131 1,131 2,615 Total 25,328 5,143 7,982 7,296 4,907 Cona Resources Ltd Financial Statements