BLACKPEARL RESOURCES INC. 2009 ANNUAL REPORt
Heavy Oil
Gems
Large Resource. Low Risk. High Potential.
Note to printer: make “Varnish” layer visible to process covers’ varnish (output black)
Assemble the assets, define the program
and execute the growth plan.
Contents:
Our objective is to build a company focused on heavy oil. We believe we have the properties in our existing inventory to
build a company capable of producing 50,000 barrels of
oil per day. this inventory includes conventional heavy oil properties as
well as properties which will require a thermal process such as SAGD to recover the oil.
We are starting with a base of about 6,000 boe per day today. It will likely take 7 to 10 years to reach our objective, but the most important ingredient to achieving this objective, in addition to highly talented staff, is to have great resource. It is getting more and more difficult to capture attractive heavy oil opportunities in western Canada. We think our three core areas provide an excellent foundation to grow the Company.
When evaluating opportunities we look for properties where we can have a high working interest and can be the operator, there is a significant amount of oil in place and there is an existing proven method to recover the oil. All of our core areas meet these criteria.
2009 Highlights
President’s Letter
A Conversation with Management
Operations Review
Reserves
Management’s Discussion and Analysis
Financial Statements
Notes to the Consolidated Financial Statements 1
2 5 9 16 19 44 47
FINANCIAL
2009 ANNUAL REPORt 1
2009 Highlights
FINANCIAL
Twelve months ended twelve months ended ($000s, except per share data) December 31, 2009 December 31, 2008
total revenue 89,637 183,536
Funds from operations 29,004 72,120
Per common share
Basic and diluted ($) 0.12 0.38
Net earnings (Loss) (47,315) (78,862)
Per common share
Basic and diluted ($) (0.19) (0.42)
Capital expenditures (1) 27,878 107,367
total assets 468,309 472,143
Long-term debt – –
Working capital 57,995 6,451
Shareholders’ equity 426,556 413,635
Weighted average shares outstanding
(basic and diluted) 243,185,591 189,241,716
Common shares outstanding at period end 261,960,717 189,241,716
OPERATIONAL
Daily Production
Oil (bbls/d) 4,324 6,182
Natural gas – net production (mcf/d) 5,582 8,942
total production boe/d 5,254 7,692
Sales Prices
Oil – average selling price per bbl ($) 51.44 68.97
Gas – average selling price per mcf ($) 4.10 8.11
Operating Costs
Operating costs ($000s) 29,461 49,907
Operating costs per boe ($) 15.36 17.77
(1) Excludes non-cash acquisitions cost.
BLACKPEARL RESOURCES INC.
2
JOHN FESTIVAL, PRESIDENT AND CEO
Despite its turbulence on many fronts – economic recession, commodity prices, credit and capital markets and investor scepticism – 2009 was also a year that confirmed BlackPearl’s strategic direction. As the theme line of this annual report suggests, we have a suite of heavy oil/oil sands gems and will be taking full advantage of the ongoing oil price recovery as we build to our 50,000 barrels per day target over the next several years. It’s a good time to be in oil, period.
We have accomplished much in the past year. When the new management group joined BlackPearl in January 2009, we began to develop a multi-year strategy to unlock the Company’s tremendous heavy oil potential.
At the time, BlackPearl owned a diverse collection of oil and natural gas properties. Following a thorough review of these properties, we decided to focus on three core heavy oil/oil sands assets. Our goal was to choose those assets that had a significant amount of oil in place, which could be recovered using a proven commercial recovery process and which we operated. Once we had chosen our core properties – Mooney, Onion Lake and Blackrod – the strategy for development evolved into a four-step process.
Laying a Foundation
In the first quarter of 2009, the oil price was below US$40 per barrel and our first concern was reducing our operating costs in order to survive. Second, we needed to add technical and operating people with heavy oil and oil sands experience. And third, we had to raise sufficient funds in order to test and validate our core projects. We achieved all of these objectives during 2009.
President’s Letter
Building BlackPearl to
boe/d 5,000
50,000 boe/day
We are starting with a base of about 5,000 boe/day. the first step in building BlackPearl was to reduce its cost structure. We achieved, on a boe basis, a 14% reduction in
operating costs and a 32% reduction in administrative costs.
2009 ANNUAL REPORt 3
Validating the Potential of Each Core Property
It was important at the outset to verify key information for each of our core properties, that would allow us to proceed with confidence through to development.
At Mooney, we continued working with our polymer pilot, achieving significant oil recovery rates and proving the effectiveness of the polymer process. We are now finalizing our lab and field-testing that will likely see us add alkali and surfactant to enhance the recovery process.
At Onion Lake, we completed a detailed geological mapping of the Dina and Cummings reservoirs and identified more than 200 potential primary locations.
We completed our first 28-well development drilling program and these initial results will help us extrapolate the property’s ultimate potential.
At Blackrod, we drilled 10 delineation wells, which validated the areal extent of the resource and provided valuable rock and fluid properties that verified our assumptions. We are now planning to construct facilities and drill our SAGD pilot well pair in Q4 2010 and commence steam injection in early 2011 – the final step before designing a commercial project.
Formulating a Development Plan
For each of our core properties we have chosen an enhanced oil recovery technology that has proven successful in similar heavy oil reservoirs in Canada.
For Blackrod, the choice of SAGD technology was obvious. Although several different thermal configurations would be effective at Onion Lake, we selected a SAGD technique that operated successfully at tangleflags, Saskatchewan for 17 years. this choice will allow us to drill primary heavy oil wells at Onion Lake for the next several years until we decide to convert the wells to steam injection and proceed with a SAGD recovery project. At Mooney, we are making a final decision regarding the combination of alkali, surfactant and polymer to use in our flood.
We anticipate completing plant modifications and commencing injection at Mooney in late 2010 or first quarter of 2011.
1,700
boe/day
Our first growth iniative occured in late 2009 with the drilling of 28 wells at Onion Lake, which added over 1,700 barrels of oil per day to our production base. there are over 200 additional primary drilling locations at Onion Lake which could add over 7,500 boe/day.
3,500
4,500
boe/day
Implementation of the first stage of an ASP flood at Mooney could add 3,500 boe/day.
boe/day
the next stage of the ASP flood at Mooney could add an incremental 4,500 boe/day.
4
Implementation
the implementation phase is all about execution – delivering projects on-time and on-budget. Our previous hands-on experience with numerous heavy oil projects in Canada gives us confidence that we will deliver on this goal. In 2010, we will continue primary development of Onion Lake, commence Phase 1 of the commercial polymer flood at Mooney and construct a SAGD pilot at Blackrod. Further stages of development for our three core projects will continue in the years ahead.
In conclusion, we have laid a solid foundation for BlackPearl. We have nearly completed the design phase for our core projects and will complete the validation of all key variables in 2011. Beyond that, we will be busy with implementation on our road to 50,000 barrels of oil per day. Shareholders can take comfort in the fact that the management team has been intimately involved in these types of activities for the past fifteen years and we are excited for the opportunity to tackle this new assignment.
two-thousand-nine was a transition year for employees, directors and shareholders. Sincere thanks to our employees for their dedication and hard work, to directors for their guidance and of course our shareholders for their patience as we charted a new direction.
On behalf of the Board of Directors,
JOHN FESTIVAL
President and Chief Executive Officer February 24, 2010
The Future
10,000
boe/day
the first phase of our SAGD development at Blackrod will add 10,000 boe/day to our production.
30,000
boe/day
Future phases of expansion at Blackrod could add 20,000 to 30,000 boe/day, and the SAGD development at Onion Lake could add 10,000 boe/day.
2009 ANNUAL REPORt 5
Q/A: A conversation with management
Q In 2009, the price difference between light and heavy oil narrowed to near-record levels which benefits BlackPearl’s heavy oil wellhead price. Do you expect this situation to continue?
Yes. three fundamental changes have occurred within North America, which should continue to contribute to a narrower price differential between light and heavy oil. North American refiners have expanded their ability to process heavy oil, which increases demand for our product. We have also seen pipeline expansions to the U.S. Gulf Coast, which is the major heavy oil processing hub in North America. third, Gulf Coast refiners have experienced decreased heavy oil shipments from both Mexico and Venezuala – which has increased the demand for Canadian heavy oil.
Q What should an investor look for in a resource company?
the most important aspect of any resource company is quality of assets. Based on our collective experience in oil sands and heavy oil, we recognize the world-class potential of the three core assets in this company.
Q These are the same assets that were in BlackPearl before you joined. What has changed?
What we brought to BlackPearl as a management team is execution. Execution entails a number of skills, which includes identifying quality assets, picking the appropriate technology for development, managing the major risks and finally, developing the assets in a cost efficient and timely manner. Our team has worked together for many years and our skills are specific to heavy oil and oil sands. When we joined BlackPearl, there were few technical people in the Company with that specific type of experience.
Q The San Miguel property in Texas does not appear to be part of your future plans. What has changed?
After a thorough technical and economic review of all the BlackPearl properties, we concluded that the San Miguel property was not one of our top three or four projects. Although San Miguel has tremendous oil potential, it needs a higher sustained oil price in order to be developed.
6
Q/A:
Q Why do you emphasize low operating costs and no debt?
In a word, survival. By achieving and maintaining a low cost structure we ensure our survival in times of low oil prices. that is also the reason we will take on little or no debt. We have learned that being a low cost producer with a conservative balance sheet will allow us to: 1) maintain control of our company under most circumstances, 2) take advantage of opportunities in down markets and 3) sleep very well at night. As both managers and investors, we have a significant portion of our net worth invested in BlackPearl shares and we do not want to jeopardize the potential that we see in the company.
Q Will you consider company and property acquisitions to
enhance your growth?
We will only entertain acquisitions if they are accretive to BlackPearl both on an asset quality and financial basis.
BlackPearl has many years of planned activity with our current properties and we don’t need acquisitions to grow the company.
Q Why sell all non-core assets? Isn’t it better to retain the production and cash flow?
Selling our non-core properties allows us to achieve two very important objectives. Our most precious resource, our people, are focused solely on our core properties. In addition, by redirecting the cash from the sale of properties to drilling new wells at Onion Lake, we are able to accelerate our production growth.
Q Do you have too many outstanding shares for a junior oil company?
Compared to most junior oil companies, we have a lot of outstanding shares. However, if you compare BlackPearl to other oil sands companies our share count is reasonable.
2009 ANNUAL REPORt 7
Q In your presentation you talk about needing at least one billion dollars of capital over the next 10 years. How will you source the funds?
At this stage we have not established our capital structure beyond the next couple of years; however, it is expected that our capital requirements will come from a number of sources. Firstly, cash flow from operations – at current prices and production, we would generate roughly $50 million per year in cash flow. Another source of capital is the sale of our non-core properties, which should generate between fifty and one hundred and fifty million dollars. this would then be supplemented by equity infusions and potentially some form of term debt instrument.
Q The goal of 50,000 barrels of oil per day is a lofty one. When will you know if that goal is achievable?
By the end of 2011 we will have tested all of our core projects and we will be able to project the ultimate potential of each one.
Q What price of oil is required for BlackPearl’s three core projects to be economic?
the price of oil needs to be US$50 to US$60 per barrel W.t.I.
for our projects to generate an acceptable return on our invested capital.
Q Lukas Lundin was a significant shareholder of Pearl. Does he still own BlackPearl shares and why did he step down from the Board?
Lukas Lundin has not sold any of his shares since the new management team joined the company. In fact, he participated in the April 2009 equity financing to maintain his pro rata share of the company. He resigned from the Board of Directors because he felt his presence was no longer directly needed.
Mr. Lundin is active in a number of other companies within the Lundin Group. We are pleased that Mr. Lundin continues to offer his wealth of experience even though he is no longer a member of the Board of Directors.
MOONEY
BLACKROD
ONION LAKE ALBERTA SASKATCHEWAN
OIL SANDS
8
2009 ANNUAL REPORt 9
Operations Review
Our activities are concentrated in the traditional heavy oil areas of Alberta and Saskatchewan in western Canada.
Onion Lake is located near Lloydminster on the Alberta/
Saskatchewan border, Mooney is just outside the Peace River Oil Sands region and our Blackrod property is located in the Athabasca Oil Sands.
In 2009, our capital expenditures were $28 million.
During 2009, we established development plans for each of these areas and our capital spending in 2010 will triple compared to 2009 as we start to implement these plans.
OVERVIEW
1,423
2,297
615
801 118
2009 Production (boe/d) by Area
8.7 10.1
3.3
.41.1
Proved + Probable Reserves (mmbbls) by Area
(as at December 31, 2009)
58,000
315,000
12,000 46,000 50,000
Land (net acres) by Area
8.2
22.3
1.2
5.0 0.3
2009 Net Operating Revenues ($mm) by Area
Other Mooney
Salt Lake/Ear Lake Onion Lake
Southern Alberta Gas
BARREL ECONOMICS*
10
Onion Lake, Alberta
Onion Lake is a heavy oil property located in
Saskatchewan on the Onion Lake First Nation reserve.
BlackPearl has an 87.5% working interest in the majority of the producing wells, with the First Nation holding the remaining 12.5% interest. the Company’s technical team undertook a thorough review of the property in 2009 and identified in excess of 200 conventional development drilling locations. Of these, 28 were drilled in late 2009 and an additional 50 are planned for 2010.
In addition to conventional drilling, a portion of the lands at Onion Lake are amenable to thermal development. this was confirmed in 2009 when the Company undertook a successful two-well thermal pilot on the property. the reservoir underlying BlackPearl’s lands is 15 to 23 metres thick, which makes it suitable for SAGD development. the thermal development area contains approximately 100 million
barrels of oil-in-place. As SAGD development would typically be expected to recover 50-70% of the oil, thermal development at Onion Lake has the potential to add significant long-life reserves for the Company, translating into 5,000-10,000 barrels of oil per day of production for 15 to 20 years.
As the Company continues to develop the property with conventional drilling, it will prepare a SAGD commercial development plan. Management anticipates three or four years of conventional heavy oil development drilling before launching thermal development.
Onion Lake provides near-term production growth as well as a longer term SAGD opportunity.
AT A GLANCE
Working interest 87.5%
Land 12,623 net acres
2P Reserves 10.1 mmbbls
API 11° oil
2009 production 2,297 boe/day
Depth 400-600 metres
Formations Dina, Cummings
2009 Milestones
• Drilled 28 conventional heavy oil wells
• Completed successful two-well CSS steam pilot
• Developed a conceptual SAGD development plan 2010 Plans
• Drill 50 conventional heavy oil wells
• Upgrade fuel gas system and water disposal facilities
• Continue developing SAGD thermal plans
• Total capital program of $30 million
$60.00
Wellhead Price
$17.00
Royalties
$1.50
transportation
$12.00
Operating Costs
$29.50
Netback
* Per barrel economics are estimates based on a WTI oil price of US$75 per barrel and a light to heavy differential of US$11 per barrel.
One well was drilled on the southern block in 2009 to retain the leases.
technical evaluation of the southern block lands is ongoing.
GR ø SP RES
twelve development wells were drilled on the northern block in 2009.
Additional wells are planned for 2010.
the Dina sand in the Onion Lake central block is 15-23 metres thick, which makes it suitable for SAGD development.
Onion Lake North Block
Onion Lake Central
Block
Onion Lake South Block
T56
T55
T54 R27W3
R1W4
2 miles
BlackPearl land CNRL land Oil pools Onion Lake
R26W3 T57
T56 1 mile
BlackPearl land Producing wells
Producing wells - drilled in 2009 Future drilling locations
Onion Lake North
R27W3
T56
T55 1 mile
BlackPearl land Producing wells Producing wells - drilled in 2009 Future drilling locations Future SAGD thermal development area
Onion Lake Central
R1W4 R28W3 R27
T55
T54
1 mile
BlackPearl land Producing wells
Producing wells - drilled in 2009 Future drilling locations
Onion Lake South
ONION LAKE NORTH CUMMING SAND
ONION LAKE SOUTH DINA ONION LAKE CENTRAL CUMMINGS
ONION LAKE NORTH CUMMINGS + DINA
PALEO PALEO
PALEO DINA
CUMMINGS CUMMINGS
CUMMINGS
PALEO DINA ONION LAKE NORTH CUMMING SAND
ONION LAKE SOUTH DINA ONION LAKE CENTRAL CUMMINGS
ONION LAKE NORTH CUMMINGS + DINA
PALEO PALEO
PALEO DINA
CUMMINGS CUMMINGS
CUMMINGS
PALEO DINA
ONION LAKE NORTH CUMMING SAND
ONION LAKE SOUTH DINA ONION LAKE CENTRAL CUMMINGS
ONION LAKE NORTH CUMMINGS + DINA
PALEO PALEO
PALEO DINA
CUMMINGS CUMMINGS
CUMMINGS
PALEO DINA ONION LAKE NORTH CUMMING SAND
ONION LAKE SOUTH DINA ONION LAKE CENTRAL CUMMINGS
ONION LAKE NORTH CUMMINGS + DINA
PALEO PALEO
PALEO DINA
CUMMINGS CUMMINGS
CUMMINGS
PALEO DINA
Onion Lake North
Onion Lake Central
Onion Lake South
Onion Lake Map
GR
GR
ø
ø
SP
SP
RES
RES
GR ø SP RES
2009 ANNUAL REPORt 11
BARREL ECONOMICS*
$55.00
Wellhead Price
$11.00
Royalties
$10.00
Operating Costs
$10.00
Gas Costs
$7.00
Capital
$17.00
Profit
* These are estimated economics based on modeling using a WTI price of US$75 per barrel and gas costs of $7 per mcf.
12
Blackrod, Alberta
Blackrod is a SAGD property located in the Athabasca oil sands. the geological formation of interest is the Lower Grand Rapids at a depth of approximately 300 metres.
the Company has an 80% working interest in the main development lands and operates the project.
In 2009, BlackPearl participated in drilling 10 stratigraphic wells on the property to confirm the areal extent and quality of the reservoir and filed an application with regulatory authorities to undertake a single-well SAGD pilot. If approval is granted in 2010, it is expected that steaming could commence during the first quarter of 2011.
In conjunction with filing the pilot application, BlackPearl completed the construction of a 50 mmbtu steam generator that will be used for the pilot. the Company has also completed about 75% of a 31-kilometre all-weather road into the proposed
facility site. the remainder of the road will be completed in the spring. this winter BlackPearl is planning to drill water source and water disposal wells in addition to two observation wells. Oil and water handling facilities and the SAGD well pair will be deferred until we receive all regulatory approvals.
Blackrod has approximately one billion barrels of oil-in-place on its Blackrod property, which has potential to produce 30,000-40,000 barrels per day as a commercial project.
Blackrod is a potential 25 year, 30,000 – 40,000 bopd opportunity.
AT A GLANCE
Working interest 80-100%
Land 30,080 net acres
2P Reserves none assigned
API 9° oil
2009 production none
Depth 300 metres
Formation Grand Rapids
2009 Milestones
• Increased working interest to 80% on the main development lands
• Drilled 10 stratigraphic wells to confirm areal extent of the reservoir
• Filed regulatory application to undertake a single-well SAGD pilot
• Completed construction of a steam generator for the pilot and began construction of a 31-kilometre all-weather road
2010 Plans
• Complete regulatory review of pilot project
• Drill two water source wells and two observation wells
• Drill SAGD well pair
• Initiate construction of surface facilities
• Total capital program of $20-23 million
12
2 1
35 36
26 25
21 22 23 24
BlackPearl land 2009 evaluation wells Phase 1 development Lower Grand Rapids Net Oil Pay (<17m pay cut off) Blackrod Contours
R18
T77
T76 366 336
26 24 22 20 18
Proposed Pilot Site
Proposed SAGD pilot well pair Phase 1 SAGD well pairs Phase 1 development Observation wells Water disposal well
T76 R18
36
25
Blackrod Blowout - Phase 1 - 10,000 BOPD Commercial Development
2009 ANNUAL REPORt 13 We have internally mapped over a
billion barrels of oil in place on the Blackrod Lease. the next step in the development of the resource is to construct a SAGD pilot to confirm operating data to design a commercial project.
the Blackrod resource has the potential to support a 40,000 bopd development. Phase 1 of commercial development will be 10,000 bopd.
Blackrod
14
Mooney, Alberta
Mooney is a conventional heavy oil property located in north-central Alberta. BlackPearl currently has an average working interest of approximately 98% in 79 sections in the Mooney field. the Mooney field produces mainly from the Bluesky sand formation, at a depth of approximately 900 metres. During 2009, oil and gas production averaged 1,423 boe per day net to BlackPearl.
BlackPearl has been operating the Mooney property for about five years. the field was initially developed using primary production; however, the Company believes the performance of the Mooney field will be enhanced through Alkali Surfactant Polymer (ASP) flooding. ASP flooding involves adding a polymer chemical to the water to thicken it and additional alkali and surfactant chemicals to mobilize additional reservoir oil. this water and chemical mix is then injected re-pressurizing the reservoir and sweeping additional oil to the producing wells. Primary production is expected to recover 3-5% of the oil-in-place. An ASP flood is expected to boost recovery to 20-30% of the
oil-in-place. Mooney has an estimated 150 million barrels of oil-in-place so any increased recovery represents a significant amount of additional oil. to date, a three well polymer pilot, operating for about 14 months, has recovered approximately 15% of the oil in place. As a result of the success of the polymer pilot, in late 2009, the Company filed a development application with the ERCB to commence a commercial ASP flood at Mooney. If approved, the first phase of the flood will likely commence in late 2010 or early in 2011. this will initially involve the conversion of producing wells to injectors and installing water and polymer handling facilities. It is expected that it will take 8 to 16 months after initial injection before there will be a production response from the ASP flood. Future phases of the ASP flood will require drilling additional horizontal wells and expansion of the surface facilities.
the Alberta government has programs in place that encourage enhanced oil recovery developments by reducing royalties on fields with tertiary recovery programs. BlackPearl plans to submit an application for royalty relief in early 2010.
AT A GLANCE
Working interest 98%
Land 46,490 net acres
2P Reserves 8.7 mmbbls
API 16° oil
2009 production 1,423 boe/day
Depth 900 metres
Formation Bluesky
2009 Highlights
• Achieved an oil recovery rate of 15% for the polymer pilot project.
2010 Plans
• Finalize optimal mix of alkali, surfactant and polymer in preparation for commercial injection.
• Apply to Department of Energy for reduced government royalties under its enhanced oil recovery program.
• Initiate phase one of the commercial ASP flood including converting existing wells to injectors and constructing water and chemical handling facilities.
• Total capital program of $25-30 million.
BARREL ECONOMICS*
$60.00
Wellhead Price
$16.00
Royalties
$2.50
transportation
$18.00
Operating Costs
$23.50
Netback
* Per barrel economics are estimates for primary recovery based on a WTI oil price of US$75 per barrel and a light to heavy differential of US$11 per barrel.
Phase 1
Phase 2
Pilot Site T72
T71 R8W5
BlackPearl land Delineation wells
Phase 1 existing horizontal wells Phase 2 future horizontal wells Bluesky oil pool
6 miles Mooney
2009 ANNUAL REPORt 15 An ASP flood uses three chemicals to recover more
oil from the reservoir. Alkali and surfactant acts like a detergent to help wash more oil from the rock. Polymer is added to thicken the water which enhances the ability to push or sweep the oil to the well bore.
• Fluid is injected at the Injection wells
• Injected fluid moves through the Bluesky oil reservoir
• Mobilized oil is produced at the Production wells
ASP Flood
Phase 1 of the ASP flood will require converting up to half of the existing wells to injectors, and constructing injection and water handling facilities. Expansion of the ASP flood (Phase 2) will require drilling up to an additional 50 horizontal wells and upgrading the surface facilities.
Mooney
16
the following tables summarize certain information contained in the independent reserves report prepared by Sproule Associates Limited (“Sproule”) as of December 31, 2009. the report was prepared in accordance with definitions, standards and procedures contained in the Canadian Oil and Gas Evaluation Handbook (“COGHE”) and National Instrument 51-101, Standards of Disclosure for Oil and Gas Activities (“NI 51-101”).
this was the first year Sproule was engaged to prepare a reserves evaluation for the Company. In the prior year the Company requested another independent engineer to evaluate possible (“3P”) reserves on the Company’s properties.
the 2008 reserves report included possible reserves for the Company’s SAGD project at Blackrod. In 2009, the Company elected not to undertake an evaluation of its possible reserves. Given the significant capital expenditures required and the uncertainty of the timing of those expenditures, the Company felt it was appropriate to defer further review of possible reserves until we have results from our proposed pilot project and a commitment from the Company’s Board of Directors to proceed with commercial development of the Blackrod lease.
On a net present value basis (10% discount, before tax), approximately 58% of the value of reserves were attributable to the Onion Lake area and 24% was attributable to the Mooney area. No reserves were assigned to the Blackrod project.
the complete list of schedules required under National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities are included in Pearl’s Annual Information Form filed on SEDAR at www.sedar.com or available on BlackPearl’s website at www.blackpearlresources.ca
Summary of Oil and Gas Reserves – Forecasted Prices and Costs
Oil & NGL Natural Gas 2009 2008
Reserves Reserves BOE (1) BOE (1)
(Company interest, before royalties) (Mbbls) (MMcf) (Mboe) (Mboe)
Proved developed producing 2,733 4,484 3,480 5,405
Proved developed non-producing 1,048 189 1,080 1,594
Proved undeveloped 6,973 240 7,013 3,475
total proved 10,754 4,913 11,573 10,474
Probable 11,795 1,659 12,071 15,856
total proved plus probable 22,549 6,572 23,645 26,330
(1) BOE’s may be misleading, particularly if used in isolation. In accordance with NI 51-101, a BOE conversion ratio of 6 Mcf: 1barrel is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Net Present Value of Reserves – Forecasted Prices and Costs
Net Present Value of Before tax Future Net Revenue Discounted at
($000s) 0% 5% 10% 15% 20%
Proved
Developed producing 117,404 107,986 100,361 94,023 88,655
Developed non-producing 38,930 32,594 28,022 24,613 21,997
Undeveloped 194,445 148,960 119,799 99,424 84,324
total proved 350,779 289,541 248,181 218,060 194,976
Probable 403,044 261,218 188,571 144,494 114,923
total proved plus probable 753,823 550,759 436,752 362,554 309,899
Oil and Gas Reserves
2009 ANNUAL REPORt 17 Net Present Value of After tax Future Net Revenue Discounted at
($000s) 0% 5% 10% 15% 20%
Proved
Developed producing 117,404 107,986 100,361 94,023 88,655
Developed non-producing 38,930 32,594 28,022 24,613 21,997
Undeveloped 194,445 148,960 119,799 99,424 84,324
total proved 350,779 289,540 248,181 218,060 194,976
Probable 302,282 197,515 143,295 110,120 87,725
total proved plus probable 653,061 487,055 391,477 328,179 282,701
Notes: Columns may not add due to rounding
the pricing assumptions used in the Sproule evaluation are summarized below.
Pricing Assumptions – Forecast Prices and Costs
Edmonton Hardisty
WtI Cushing Par Price Lloydblend Alberta
40° API 40° API 20.5° API AECO-C Spot Inflation rate Exchange rate
Year (US$/bbl) (CDN$/bbl) (CDN$/bbl) (CDN$/MMBtu) (%/yr) (US$/Cdn$)
2010 79.17 84.25 74.14 5.36 2.0 0.92
2011 84.46 89.99 78.29 6.21 2.0 0.92
2012 86.89 92.61 76.86 6.44 2.0 0.92
2013 90.20 96.19 78.87 7.23 2.0 0.92
2014 92.01 98.13 79.49 7.98 2.0 0.92
2015 93.85 100.11 81.09 8.16 2.0 0.92
2016 95.72 102.13 82.73 8.34 2.0 0.92
2017 97.64 104.19 84.40 8.52 2.0 0.92
2018 99.59 106.30 86.10 8.71 2.0 0.92
2019 101.58 108.44 87.84 8.90 2.0 0.92
2020 103.61 110.63 89.61 9.10 2.0 0.92
Escalation rate of 2.0% thereafter
Notes:
1) the pricing assumptions were provided by Sproule Associates Limited
2) None of the Company’s future production is subject to a fixed or contractually committed price.
18
Reconciliation of Company Gross Reserves by Principal Product Type – Forecasted Prices and Costs
Associated and
Light and Medium Oil Heavy Oil Non-Associated Gas Natural Gas Liquids
Gross Gross Gross Gross
Proved Proved Proved Proved
Gross Gross Plus Gross Gross Plus Gross Gross Plus Gross Gross Plus Proved Probable Probable Proved Probable Probable Proved Probable Probable Proved Probable Probable Factors (Mbbl) (Mbbl) (Mbbl) (Mbbl) (Mbbl) (Mbbl) (MMcf) (MMcf) (MMcf) (Mbbl) (Mbbl) (Mbbl) 31-Dec-08 195 102 297 8,543 13,935 22,478 10,286 10,786 21,072 20 21 41
Extensions 0 0 0 0 0 0 23 6 19 0 0 0
Improved Recovery 0 0 0 0 0 0 0 0 0 0 0 0
technical Revisions -22 -14 -36 3,401 -2,485 916 -3,168 -8,872 -12,031 8 -10 -3
Discoveries 0 0 0 0 0 0 49 2 51 0 0 0
Acquisitions 0 0 0 0 0 0 0 0 0 0 0 0
Dispositions -35 -45 -80 0 0 0 0 -229 -229 0 -4 -4
Economic Factors 0 0 0 219 294 513 -215 -34 -249 0 0 0
Production -27 0 -27 -1,542 0 -1,542 -2,061 - -2,061 -5 0 -5
31-Dec-09 110 44 154 10,621 11,744 22,365 4,914 1,659 6,572 23 7 30
Production History
the following table indicates the Company’s average daily production from its significant fields in 2009 and 2008:
2009 2008
Oil(bbl/d)(1) Gas(mcf/d) boe/d Oil(bbl/d)(1) Gas(mcf/d) boe/d
Onion Lake 2,276 128 2,297 2,217 366 2,278
Mooney 1,178 1,469 1,423 1,671 2,605 2,105
Ear Lake 424 145 448 360 140 383
Salt Lake 262 543 353 389 794 521
LongCoulee/Little Bow 9 2,407 410 10 3,362 570
Other 125 890 323 1,535 1,675 1,815
4,324 5,582 5,254 6,182 8,942 7,672
(1) Includes natural gas liquids
2009 AnnuAl report 19 the following is Management’s Discussion and Analysis (MD&A) of the operating and financial results of Blackpearl resources Inc. for the year ended December 31, 2009. these results are being compared with the year ended December 31, 2008. the MD&A should be read in conjunction with the Company’s audited consolidated financial statements for the twelve months ended December 31, 2009, together with the accompanying notes.
references to “we”, “our”, “us”, “the Company” or “Blackpearl” means Blackpearl resources Inc. and its subsidiaries.
All dollar amounts are referenced in thousands of Canadian dollars, except where otherwise noted. the consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAp).
throughout this MD&A the calculation of barrels of oil equivalent (boe) is based on a conversion rate of six thousand cubic feet (mcf) of natural gas for one barrel of oil. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy equivalence conversion method primarily applicable at the burner tip and does not represent a value equivalence at the wellhead.
this report includes terms commonly used in the oil and gas industry, such as cash flow and funds from operations which represent cash flow from operating activities expressed before changes in non-cash working capital, and cash flow per share. these terms are used by the Company to analyze operating performance, leverage and liquidity and to provide shareholders and investors with additional information to measure the Company’s performance and efficiency and its ability to fund a portion of its future activities. these terms do not have standardized meanings prescribed by GAAp and therefore may not be comparable with the calculations of similar measures for other entities. Consequently, these are referred to as non-GAAp measures.
Additional information relating to the Company, including its Annual Information Form, is available on SeDAr at www.sedar.com.
this MD&A contains forward-looking information and statements. At the end of this MD&A is an advisory on forward- looking information and statements.
the effective date of this MD&A is February 25, 2010.
OVERVIEW
Blackpearl is a Canadian-based oil and gas company whose common shares are traded on the tSX exchange under the symbol “pXX” and on the First north (oMX nordic exchange) under the symbol “pXXS”. Blackpearl’s main focus is heavy oil projects in Western Canada and the uSA. the Company also holds interests in a number of natural gas properties.
Blackpearl’s current core properties include:
• Onion Lake, Saskatchewan – heavy oil;
• Mooney, Alberta – heavy oil; and
• Blackrod, Alberta – heavy oil.
Management’s Discussion and Analysis
20
these core properties provide the Company with a combination of short-term cash flow generation, medium-term reserves and production growth, enhanced oil recovery (eor) development and longer-term reserves and production growth using thermal processes.
As part of Blackpearl’s overall business plan, management intends to sell the majority of the Company’s non-core assets. In early 2010, the Company has accepted offers to sell assets producing approximately 350 boe/day of primarily natural gas assets in Southern Alberta and plans to market for sale a 350 boe/day heavy oil field in Saskatchewan.
Additional non-core asset sales are planned over the next two or three years.
2009 SIGNIFICANT EVENTS
• The deterioration in the financial markets, which began in 2008 as a result of a credit crisis and global recession, continued throughout 2009. the worldwide financial crisis has directly impacted the demand for crude oil and natural gas and resulted in dramatically lower commodity prices compared to 2008. Blackpearl has not been immune from these circumstances and this has resulted in significantly lower revenues. the Company has been successful in lowering operating costs and administrative expenses to reduce the effects of lower revenues.
• On January 1, 2009, the Company amalgamated CODA Holdings (acquired in 2008) with Pearl E&P Canada Ltd.
• On January 8, 2009, the Company acquired all of the issued and outstanding shares of BlackCore Resources Inc. in exchange for 17,600,000 common shares of the Company, as well as 5,000,160 Class A and 5,000,160 Class B share purchase warrants. each Class A and Class B warrant allows the holder to acquire one Blackpearl share for a price of $0.60 when the Blackpearl share price reaches a volume-weighted average price for 30 consecutive days of $1.50 and $2.00, respectively. In addition, 2,500,000 common shares of the Company were issued to extinguish the potential contingency payments related to the purchase of lands in the Blackrod area. In conjunction with the acquisition, the Company hired a new management team which was formerly with Blackrock Ventures Inc. Members of the new Blackpearl management team were also the principal shareholders of BlackCore.
• On January 28, 2009, the Company closed an agreement with Serrano Energy Ltd. (Serrano) to exchange the Company’s equity interest in Serrano for an additional 15% interest in the Blackrod area lands (increasing the Company’s working interest to 80% in the main project area) and a carried work commitment of $5 million.
the Company has become the operator of the Blackrod project.
• Due, in part, to lower commodity prices, the Company reduced its capital program during 2009 to total expenditures of $27.9 million. In 2008 capital expenditures were $107.4 million.
• On April 20, 2009, the Company issued 52,334,000 special warrants of BlackPearl at a price of $0.88 per special warrant, for aggregate net proceeds of approximately $43.7 million. each special warrant was converted into one common share of the Company on May 6, 2009.
• On May 8, 2009, Pearl Exploration and Production Ltd. changed its name to BlackPearl Resources Inc.
2009 AnnuAl report 21
ANNUAL FINANCIAL INFORMATION
As at and for the period ended
12 months 12 months 15 months
$000s, except where noted December 31, 2009 December 31, 2008 December 31, 2007
total revenues 89,637 183,536 128,524
loss from continuing operations and net loss (47,315) (78,862) (227,206)
Per share – basic (0.19) (0.42) (1.73)
Per share – diluted (0.19) (0.42) (1.73)
Cash flow from operations (1) 29,004 72,120 21,646
Per share – basic 0.12 0.38 0.16
Per share – diluted 0.12 0.38 0.16
Capital expenditures 27,878 107,367 229,246
total assets 468,309 472,143 575,865
Common shares outstanding 261,961 189,242 189,242
(1) Cash flow from operations before working capital changes and cash flow per share do not have standardized meanings prescribed by Canadian generally accepted accounting principles (GAAp) and therefore may not be comparable to similar measures used by other companies. Cash flow from operations before working capital changes includes all cash flow from operating activities and is calculated before changes in non- cash working capital. Cash flow from operations before working capital changes is reconciled with net loss on the Consolidated Statements of Cash Flows. Management uses these non-GAAp measurements for its own performance measures and to provide its shareholders and investors with a measurement of the Company’s efficiency and its ability to fund a portion of its growth expenditures.
SELECTED QUARTERLY INFORMATION
31-Dec 30-Sep 30-Jun 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar
$000s, except where noted 2009 2009 2009 2009 2008 2008 2008 2008
production (boe/d) 5,306 5,091 5,170 5,510 6,198 5,776 8,246 10,503
revenue ($/boe) 56.69 51.94 47.07 31.77 36.28 85.02 79.74 60.50
oil & gas revenue 27,674 24,065 22,143 15,755 20,687 45,180 59,839 57,830 production costs 7,251 6,172 5,873 10,165 10,299 9,272 11,453 18,883 net earnings (loss) (1) (3,897) (12,013) (10,889) (20,516) (83,686) 1,926 6,688 (3,790) per share,
basic and diluted ($) (0.01) (0.05) (0.05) (0.10) (0.44) 0.01 0.04 (0.02) Cash flow from operations 14,677 8,221 7,910 (1,804) 3,623 21,021 28,023 19,452 per share,
basic and diluted ($) 0.06 0.03 0.03 (0.01) 0.02 0.11 0.15 0.10
total assets 468,309 465,942 477,876 450,836 472,143 554,956 543,123 584,237 Weighted average shares
outstanding (000s) 261,731 261,684 240,973 207,555 189,242 189,242 189,242 189,242
(1) the higher losses in 2009, compared to 2008, are a result of lower commodity prices and higher depletion costs. the loss in the fourth quarter of 2008 was the result of a write-down of the carrying value of the Company’s uS properties of $57.4 million.
22
RESULTS OF OPERATIONS
$000s, except where noted 2009 2008
net loss (47,315) (78,862)
per share, basic and diluted ($) (0.19) (0.42)
For the year ended December 31, 2009, the Company incurred a net loss of $47.3 million or $0.19 per share compared to a net loss of $78.9 million or $0.42 in 2008. the net loss for the current year is principally a result of lower commodity prices and high depletion costs. the 2008 loss is mainly a result of high depletion costs as well, but also includes a $57.4 million write-down of the Company’s u.S. oil and gas assets.
C O M M O D I T Y P R I C E S
Crude oil prices, on average, were weaker in 2009, with the West texas Intermediate (WtI) reference price averaging uS$61.80 per barrel compared with uS$99.65 per barrel in 2008. lower 2009 commodity prices were due to decreased demand as a result of the global recession and financial crisis. the WtI forward strip price for 2010 is approximately uS$81 although oil prices are expected to remain volatile due to the effects of the economic slowdown on supply and demand.
the majority of Blackpearl’s production revenues are derived from the sale of heavy oil, which receives a lower price than light oil due to increased processing requirements for a heavy barrel. the difference between the reference price of light oil and the reference price of heavy oil is commonly referred to as the light/heavy differential. the light/heavy differential averaged 17% in 2009 and 22% in 2008. the recent light/heavy differential is considerably narrower than the five-year average of approximately 26%, a trend that has been attributed to increased heavy oil refining capacity in the u.S., increased demand for Canadian heavy oil due to reduced supply of heavy oil from Mexico and Venezuela, as well as improved pipeline access for Canadian heavy crude to the Gulf Coast, a heavy oil refining hub.
oil prices in Canada are also impacted by the Canada/u.S. dollar exchange rate since the WtI reference price of oil is in u.S. dollars. During 2009, the Canadian dollar weakened against the u.S. dollar, averaging 1.142 compared with 1.066 in 2008. the weakening of the Canadian dollar partially offsets the reduced WtI benchmark pricing experienced during 2009.
In 2009, natural gas prices decreased 54% compared to 2008, reflecting lower demand. the AeCo-C gas price averaged $3.75 per GJ in 2009 compared to $8.13 per GJ in 2008. As with oil prices, natural gas prices decreased as a result of lower demand caused by slowing economies and warm weather which resulted in higher than normal gas storage levels.
2009 2008
WtI oil (uS$/bbl) 61.80 99.65
Western Canadian Select heavy oil (Cdn$/bbl) 58.69 82.95
light/heavy differential 17% 22%
Foreign exchange rate (Cdn$/uS$) 1.142 1.066
AECO natural gas (Cdn$/GJ) 3.75 8.13
2009 AnnuAl report 23 OIL AND GAS PRODUCTION, PRICING AND REVENUE
2009 2008
Daily production/sales volumes (1)
oil (bbls/d) 4,324 6,182
natural gas (mcf/d) 5,582 8,942
Combined (boe/d) 5,254 7,672
product pricing
oil ($/bbl) 51.44 69.07
natural gas ($/mcf) 4.10 8.11
Combined ($/boe) 46.74 65.36
revenue ($000s)
Oil and gas revenue – gross 89,637 183,536
royalties (21,262) (45,192)
Oil and gas revenue – net 68,375 138,344
(1) Gas production converted at 6:1
oil and gas revenues decreased 51% in 2009 to $89.6 million compared with $183.5 million in 2008. the decrease is attributable to:
• a 30% decrease in oil production;
• a 25% decrease in the average oil price;
• a 38% decrease in natural gas production; and
• a 49% decrease in the average gas price.
on a boe basis, 81% of the Company’s oil and gas production was heavy oil. the percentage of revenues derived from heavy oil will likely increase in the future as all of the Company’s ongoing development activities will be in heavy oil areas. the onion lake area accounted for 44% of total production in 2009 and will contribute a higher proportion in 2010 as it will account for most of Blackpearl’s near-term drilling activity.
2009 2008
Oil (bbls/d)(1) Gas (mcf/d) boe/d oil (bbls/d)(1) Gas (mcf/d) boe/d
onion lake 2,276 128 2,297 2,217 366 2,278
Mooney 1,178 1,469 1,423 1,671 2,605 2,105
ear lake 424 145 448 360 140 383
Salt lake 262 543 353 389 794 521
long Coulee/little Bow 9 2,407 410 10 3,362 570
other 175 890 323 1,535 1,675 1,815
4,324 5,582 5,254 6,182 8,942 7,672
(1) Includes nGl’s
24
overall, average production decreased 32% to 5,254 boe/d for the year ended December 31, 2009 compared with 7,672 boe/d in the same period 2008. the decrease in 2009 production is attributable to the sale of certain oil and gas properties in May 2008. At the time of sale these properties were producing approximately 3,200 boe/d. the decrease in production was also impacted by natural declines and reduced drilling activity in 2009. As a result of a fourth quarter drilling program at onion lake, the Company exited 2009 with production in excess of 6,000 boe/d.
the Company did not enter into any hedging arrangements in 2009, and, at the present time, does not anticipate hedging any of its production in 2010.
ROYALTIES
$000s, except where noted 2009 2008
royalties 21,262 45,192
As a percentage of revenue 24% 25%
royalties decreased 53% from $45.2 million in 2008 to $21.3 million in 2009, mainly reflecting lower revenues and production during 2009, as well as lower commodity prices.
the Company’s largest area, onion lake, is on the onion lake First nation reserve, and royalties are paid to the First nation based on Saskatchewan Crown equivalent rates.
The New Royalty Framework (NRF) in Alberta took effect January 1, 2009. The NRF generally increased royalty rates in Alberta, with some sensitivity to well production rates and commodity prices, and also eliminated most royalty incentive and holiday programs. Subsequent to the introduction of the nrF, the Alberta government has introduced various amendments to the royalty structure in response to the economic downturn and the resulting decrease in oilfield activity. these amendments included a 5% royalty for one year for production from new wells drilled after March 31, 2009.
Approximately 35% of Blackpearl’s total production is from Alberta-based properties. the significant areas affected by the new royalty schemes are Mooney and little Bow/long Coulee. Mooney has higher volume wells, which was negatively affected by the NRF royalty changes; Little Bow/Long Coulee have low productivity wells and pay lower royalties than under the old royalty structure.
the Alberta government is currently undertaking a review of the energy sector to determine if, among other things, the royalty structure in Alberta is competitive with other jurisdictions. results of this review are expected in the first quarter of 2010.
PRODUCTION COSTS
$000s, except where noted 2009 2008
production costs 29,461 49,907
per boe ($) 15.36 17.77
2009 AnnuAl report 25 the 41% decrease in overall production costs in 2009 versus 2008 is the result of lower production levels.
production costs on a per boe basis averaged $15.36 in 2009, a decrease from $17.77 in 2008. the lower rates are due to improved operating efficiencies resulting in lower labour costs, fuel and chemical usage and improved sand- handling processes. Management expects production expenses will remain on the order of $15 per boe in 2010. new heavy oil wells tend to have higher initial expenses due to increased sand production but these fixed costs can be reduced on a per boe basis by higher production.
TRANSPORTATION COSTS
$000s, except where noted 2009 2008
transportation costs 3,466 3,664
per boe ($) 1.81 1.30
transportation costs are incurred to move marketable crude oil and natural gas to their selling points.
Average transportation costs in 2009 were $1.81 per boe which is an increase from the $1.30 realized in 2008.
Changes in transportation costs are generally related to moving crude oil to different sales points to capture better marketing opportunities.
OPERATING NETbACk
2009 2008
revenues 46.74 65.36
royalties 11.09 16.11
transportation costs 1.81 1.30
production costs 15.36 17.77
netback per boe 18.48 30.18
the 2009 netback of $18.48 per boe is considerably lower than the $30.18 reported in 2008, but is consistent with the lower oil and gas prices during the year.
GENERAL AND ADMINISTRATIVE ExPENSES (G&A)
$000s, except where noted 2009 2008
Gross G&A expense (before provision for bad debts) 9,681 16,075
operator recoveries (1,446) (2,891)
8,235 13,184
provision for bad debts (1,322) 1,816
net G&A expense 6,913 15,000
per boe ($) 3.60 5.34
the decrease in general and administrative costs is a result of staff reductions implemented early in 2009 as well as other cost reduction initiatives adopted by the Company that resulted in savings in areas such as outside consulting fees, travel costs and office expenses.
26
In 2008, Blackpearl recorded a provision for bad debts of $1.8 million. this included taking a $0.6 million provision for receivables due from SemCanada Crude Company and SemCanada energy Company, which filed for creditor protection in Canada and the united States. In 2009, as a result of collecting some of the receivables we had taken provision for in prior years, as well as exercising our right of offset to net some of our liabilities against receivables, we were able to reduce the provision for bad debts previously set up, resulting in a recovery of $1.3 million in 2009.
net general and administrative costs are expected to be in the area of $8 million in 2010. As production volumes are expected to increase in 2010, general and administrative costs on a boe basis should decline.
DEPLETION, DEPRECIATION AND ACCRETION (DD&A)
$000s, except where noted 2009 2008
Depletion, depreciation and accretion 81,100 85,385
per boe ($) 42.29 30.41
DD&A expense was $81.1 million or $42.29 per boe for 2009 in comparison to $85.3 million or $30.41 per boe for 2008. Although production decreased in 2009, the Company still recognized a higher depletion rate as a result of a significant reduction in proved reserves as detailed in the Company’s 2008 reserve report. proved reserves increased in the 2009 report and, as a result, the Company expects a slightly lower depletion rate in 2010. A write-down in the amount of $2.9 million of the uS assets has been included in 2009 depletion, depreciation and accretion in the Company’s December 31, 2009 financial statements.
STOCk-bASED COMPENSATION
$000s, except where noted 2009 2008
Stock-based compensation 1,461 3,116
per boe ($) 0.76 1.11
the Company uses the fair value method of accounting for stock options granted to directors, officers, employees and consultants whereby the fair value of all stock options granted is recorded as a charge to operations. the fair value of common share options granted is estimated on the date of grant using the Black-Scholes options pricing model.
In 2009, the Company issued 6.3 million options at prices ranging from $0.63 to $2.21 per share. In addition, 0.3 million options were exercised and 3.7 million were forfeited.
the reduction in expenses for 2009 is a result of a large number of options being forfeited by former employees during the period. Any previous expense recorded that related to the unvested forfeited options was reversed in the current period.
2009 AnnuAl report 27 INTEREST ExPENSE
$000s, except where noted 2009 2008
Interest income (321) (1,511)
Interest expense 277 828
net interest expense (income) (44) (683)
per boe ($) (0.02) (0.24)
Interest expense consists mainly of standby fees on the Company’s undrawn credit facility. Any interest earned on excess cash held by the Company is netted against interest expense. the decrease in 2009 is a result of less favourable interest rates on excess cash during the year.
INCOME TAxES
$000s, except where noted 2009 2008
Current income and other taxes (2,351) (517)
Future income tax (recovery) (5,634) 4,066
(7,985) 3,549
Blackpearl pays Saskatchewan resource surcharge based on its production revenues in the province. the recovery of current income tax in 2009 is the result of amendments filed on previously paid amounts for Saskatchewan resource surcharge. the Company does not have any current income tax payable and does not expect to pay current income taxes in 2010. the Company has the following estimated tax pools as at December 31, 2009:
$000s, except where noted Rate % 2009 2008
Canadian exploration expenses 100 $ 9,581 $ 9,353
Canadian development expenses 30 119,686 143,840
Canadian oil and gas property expenses 10 15,128 12,701
undepreciated capital costs 10-30 173,977 168,532
non-capital losses (various expiry dates) 100 92,173 64,107
Share issuance costs 5 years 10,419 12,435
$ 420,964 $ 410,968 the provision for future income taxes in 2009 is a recovery of $5.6 million compared to an expense of $4.1 million in 2008. the significant write-down in 2008, together with the net loss in 2009, triggered the recovery.
LIQUIDITY AND CAPITAL RESOURCES
Blackpearl began 2009 with a working capital position of $6.5 million and an undrawn credit facility of $47 million.
However, in the first quarter, due to low commodity prices, the Company did not generate any positive cash flow from operations. Management is committed to a philosophy of funding capital budgets from available cash flow from operations, working capital, non-core asset sales, equity financings and minimizing the use of debt. As a result, early in the year Blackpearl reduced capital expenditures to a minimum and conserved its working capital. Due to the economic slowdown and uncertainty in the financial and credit markets, access to additional capital was limited.
28
In the spring, oil prices began to improve and financial markets began to stabilize. the Company’s cash flow was improving but was insufficient to fund a meaningful capital program. With the equity markets opening up management completed an offering of 52.3 million common shares at $0.88 per share, which raised net proceeds of $43.7 million.
this financing provided the financial flexibility to plan a capital expenditure program for the next 12 to 18 months that was not completely tied to the generation of operating cash flow. With the successful equity placement, the Company opted to reduce its credit facility to $25 million to reduce standby fees and other charges. the amount available under the credit facility is based on the value of oil and gas reserves. the next annual review of the Company’s credit facility is scheduled to be completed by May 31, 2010.
At December 31, 2009, Blackpearl had a working capital position of $58 million and an undrawn credit facility. the only financial covenant in the Company’s credit facility is to maintain a working capital ratio of 1:1 at the end of each fiscal quarter. Working capital ratio is defined as current assets plus unutilized credit under the credit facility compared to current liabilities. the Company had a working capital ratio of 6.1:1 at December 31, 2009 and was in compliance with these covenants throughout 2009.
Cash flow from operations was $29.0 million in 2009, compared to $72.1 million in 2008. the decrease is a direct result of lower commodity pricing and lower production levels in 2009.
CAPITAL ExPENDITURES
Blackpearl’s capital program is focused on heavy oil opportunities. During 2009, Blackpearl’s capital program totalled
$27.9 million, a significant decrease from the $107.4 million spent in 2008.
$000s 2009 2008
land 3,692 4,559
Seismic 168 3,083
Drilling and completion 18,849 57,107
equipment 5,169 35,804
other – 561
total exploration and development 27,878 101,114
property acquisitions – 6,253
total capital expenditures 27,878 107,367
property dispositions (250) (79,097)
net capital expenditures 27,628 28,270
2009 AnnuAl report 29
SEGMENTED INFORMATION
the Company presently has one reportable business segment, that being oil and gas exploration, development and production. the Company’s operations are located in the following geographic locations:
2009
$000s Canada U.S. Consolidated
total revenues, net of royalties $ 67,922 $ 453 $ 68,375
net loss (42,876) (4,439) (47,315)
Segment assets 461,529 6,780 468,309
Capital additions $ 25,837 $ 2,041 $ 27,878
2008
$000s Canada u.S. Consolidated
total revenues, net of royalties $ 136,440 $ 1,904 $ 138,344
net income (20,921) (57,941) (78,862)
Segment assets 459,659 12,484 472,143
Capital additions $ 86,765 $ 20,602 $ 107,367
CONTRACTUAL ObLIGATIONS AND CONTINGENCIES
the Company has a number of financial obligations in the ordinary course of business. the following table summarizes the outstanding contractual obligations and commitments of the Company as at December 31, 2009:
$000s 2010 2011 2012 2013 2014 thereafter
Long-term debt – – – – – –
operating leases (1) 1,098 1,166 1,234 1,234 1,626 2,946
Drilling rig commitment (2) 616 935 1,211 319 – –
1,714 2,101 2,445 1,553 1,626 2,946
(1) relates to a lease for office premises, including estimated operating costs (net of sublease recoveries). the Company’s office lease was executed jointly with another party. under the terms of the lease, Blackpearl and the other party are joint and severally liable for the obligations pursuant to the lease. Accordingly, if the other party or any of the subtenants of a portion of the space are unable to fulfill their lease obligation, Blackpearl would be required to pay an additional $19.3 million (including an estimate for operating costs) over the next seven years.
(2) relates to a commitment to utilize a drilling rig from a specific company for a minimum number of days per year.
these obligations are expected to be funded from operating cash flow.
the Company also has ongoing obligations related to the abandonment and reclamation of well sites and facilities which have reached the end of their economic lives. remediation programs are undertaken regularly in accordance with applicable legislative requirements.
FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS
At December 31, 2009, Blackpearl’s financial assets and liabilities primarily consisted of cash, accounts receivable, taxes receivable and accounts payable and accrued liabilities. the Company is exposed to commodity price risk, foreign exchange risk, credit risk, interest rate and liquidity risks associated with these financial assets and liabilities.
