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Press release from Marketwire

Bonterra Energy Corp. Announces First Quarter 2010 Results

Wednesday, May 12, 2010

Bonterra Energy Corp. Announces First Quarter 2010 Results17:05 EDT Wednesday, May 12, 2010CALGARY, ALBERTA--(Marketwire - May 12, 2010) - NOT FOR DISTRIBUTION TO U.S. NEWS WIRE SERVICES OR DISSEMINATION IN THE UNITED STATES.Bonterra Energy Corp. ("Bonterra" or the "Company") (www.bonterraenergy.com) (TSX:BNE) is pleased to announce its financial and operational results for the three months ended March 31, 2010. HIGHLIGHTS For the three months ended March 31, December 31, March 31, ($ 000s except $ per share) 2010 2009 2009 ---------------------------------------------------------------------------- FINANCIAL Revenue - realized oil and gas sales 27,248 24,946 19,300 Funds flow (3) 21,326 37,595 8,376 Per share - basic 1.14 2.07 0.49 Per share - diluted 1.11 2.06 0.49 Payout ratio (1) 50% 24% 74% Cash flow from operations 15,073 13,673 6,632 Per share - basic 0.81 0.76 0.38 Per share - diluted 0.79 0.75 0.38 Payout ratio (1) 70% 66% 94% Cash dividends per share (1) 0.57 0.50 0.36 Net earnings 12,040 52,136 6,093 Per share - basic 0.64 2.88 0.35 Per share - diluted 0.63 2.85 0.35 Capital expenditures and acquisitions net of dispositions 15,141 (16,976) 2,696 Total assets 305,440 293,987 260,732 Working capital deficiency 13,178 10,162 14,909 Bank debt 63,097 59,823 89,383 Shareholders' equity 125,392 118,874 56,377 ---------------------------------------------------------------------------- OPERATIONS Oil and NGLs - barrels per day 3,345 3,182 3,268 - average price ($ per barrel) 74.88 68.40 45.80 Natural gas - MCF per day 10,038 10,193 11,877 - average price ($ per MCF) 5.11 4.76 5.19 Total barrels of oil equivalent per day (BOE)(2) 5,018 4,881 5,245 ---------------------------------------------------------------------------- (1) Cash payments per share are based on payments made in respect of production months within the quarter. (2) BOE is calculated using a conversion ratio of 6 MCF to 1 barrel of oil. The conversion is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead and as such may be misleading if used in isolation. (3) Funds flow is not a recognized measure under GAAP. For these purposes, the Company defines funds flow as funds provided by operations before changes in non-cash operating working capital items but including gain on sale of property, adjustments of investment tax credit receivable and excluding restricted cash and asset retirement expenditures. REPORT TO SHAREHOLDERSBonterra Energy Corp. is pleased to report its operating and financial results for the three months ended March 31, 2010. During the first quarter of the year, Bonterra continued to focus on the accelerated development of its horizontal drilling program targeting the Pembina Cardium, improving its financial performance and providing superior value to its shareholders.OperationsProduction in the first quarter of 2010 averaged 5,018 BOE per day, an increase of approximately three percent quarter over quarter. This modest increase is mainly attributable to additional production associated with the fourth quarter 2009 drill program and was offset by the Company's disposition of approximately 235 BOE per day of production in non-core areas during the fourth quarter of 2009 and first quarter of 2010. These sales reduced the quarter over quarter production increase from eight percent to three percent.Bonterra's 2010 capital development program is focused on its Pembina Cardium horizontal drilling program and capital expenditures for the year are estimated at $50 million, net of drilling credits (increased from an initial budget of $37 million). The majority of the planned 20 to 30 wells will be located within the Halo area of its property. However, the Company also plans to conduct some drilling in the main portion of the pool with the objective of converting some potential vertical locations to horizontal locations.To date, the Company is pleased and excited with its development of this area. Bonterra is constantly increasing its knowledge and understanding of the Cardium development and the ability to extract a larger percentage of the original-oil-in-place in both the Halo area and main part of the Pembina Cardium pool. For more details kindly refer to the Company's website at www.bonterraenergy.com.During the first quarter, Bonterra spent approximately $20.7 million primarily on the drilling of nine gross (eight net) Pembina Cardium horizontal wells. Of these wells, only one was on production prior to quarter-end and thus had little impact on first quarter production numbers. Currently, eight of these wells have now been placed on production with the last well expected to be completed and tied-in as soon as spring break-up is complete and road bans are lifted. The summer drill program will recommence at this time as well.The Company believes that the development of this play is important for future growth and for generating long-term value for shareholders. Bonterra continues to forecast 2010 production levels between 5,700 and 6,000 BOE per day.FinancialFinancial results during the first quarter substantially improved due to increased production levels and strengthening commodity prices, most notably in crude oil. Revenue and cash flow from operations increased 63 percent and 128 percent, respectively when compared to the same period in 2009. Crude oil prices improved approximately 64 percent while natural gas prices decreased approximately two percent over the same time frame. Quarter over quarter saw continued improvements, again due mainly to the healthier commodity pricing environment which included a modest gain in natural gas prices.Bonterra's netbacks have also shown improvements with a 13 percent increase to $34.38 per BOE in the first quarter of 2010 compared with $29.57 per BOE in the fourth quarter of 2010. Netbacks have been positively impacted by commodity prices. In addition, Bonterra has decreased both field operating costs and general and administrative costs quarter over quarter which has also contributed to these enhanced levels.DividendsAs a result of the Company's improved financial results, Bonterra was able to increase the dividend to shareholders beginning with an increase to $0.18 per share for the January 29, 2010 dividend payment from $0.16 per share previously. Bonterra has subsequently increased the dividend once again to its current level of $0.21 per share beginning with the April 30, 2010 dividend payment.Dividend payments to shareholders in respect of first quarter 2010 operations totaled $0.57 per share with a payout ratio of 50 percent of funds flow. Management and the Board of Directors monitor production volumes, commodity prices, operating costs, payout ratios and capital expenditures on a monthly basis to determine the dividend amount. Bonterra currently intends to pay out between 60 to 75 percent of its cash flow while retaining the remainder for capital expenditure requirements. Considering the Company's aggressive capital expenditures for 2010, it is anticipated that production volumes may increase in subsequent quarters. Monthly dividends will continue to be influenced by production volumes and commodity prices.Forward-looking InformationCertain statements contained in this press release include statements which contain words such as "anticipate", "could", "should", "expect", "seek", "may", "intend", "likely", "will", "believe" and similar expressions, relating to matters that are not historical facts, and such statements of our beliefs, intentions and expectations about development, results and events which will or may occur in the future, constitute "forward-looking information" within the meaning of applicable Canadian securities legislation and are based on certain assumptions and analysis made by us derived from our experience and perceptions. Forward-looking information in this press release includes, but is not limited to: expected cash provided by continuing operations; cash dividends; future capital expenditures, including the amount and nature thereof; oil and natural gas prices and demand; expansion and other development trends of the oil and gas industry; business strategy and outlook; expansion and growth of our business and operations; and maintenance of existing customer, supplier and partner relationships; supply channels; accounting policies; credit risks; and other such matters.All such forward-looking information is based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances. The risks, uncertainties, and assumptions are difficult to predict and may affect operations, and may include, without limitation: foreign exchange fluctuations; equipment and labour shortages and inflationary costs; general economic conditions; industry conditions; changes in applicable environmental, taxation and other laws and regulations as well as how such laws and regulations are interpreted and enforced; the ability of oil and natural gas companies to raise capital; the effect of weather conditions on operations and facilities; the existence of operating risks; volatility of oil and natural gas prices; oil and gas product supply and demand; risks inherent in the ability to generate sufficient cash flow from operations to meet current and future obligations; increased competition; stock market volatility; opportunities available to or pursued by us; and other factors, many of which are beyond our control.Actual results, performance or achievements could differ materially from those expressed in, or implied by, this forward-looking information and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking information will transpire or occur, or if any of them do, what benefits will be derived there from. Except as required by law, Bonterra disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise.The forward-looking information contained herein is expressly qualified by this cautionary statement. FINANCIAL AND OPERATIONAL DISCUSSION Quarterly Comparisons 2010 2009 ---------------------------------------------------------------------------- Financial ($ 000s except $ per share) Q1 Q4 Q3 Q2 Q1 ---------------------------------------------------------------------------- Revenue - realized oil and gas sales 27,248 24,946 20,965 20,501 19,300 Cash flow from operations 15,073 13,673 9,350 9,238 6,632 Per share - basic 0.81 0.76 0.50 0.52 0.38 Per share - diluted 0.79 0.75 0.50 0.52 0.38 Cash distributions (1) 0.57 0.50 0.44 0.40 0.36 Payout Ratio (1) 70% 66% 87% 77% 94% Net earnings 12,040 52,136 5,790 4,544 6,093 Per share - basic 0.64 2.88 0.32 0.26 0.35 Per share - diluted 0.63 2.85 0.32 0.26 0.35 Capital expenditures and acquisitions net of disposals 15,141 (16,976) 17,660 2,255 2,701 Total assets 305,440 293,987 273,543 258,393 260,732 Working capital deficiency 13,178 10,162 14,455 13,989 14,909 Bank debt 63,097 59,823 81,386 71,573 89,383 Shareholders' equity 125,392 118,874 74,025 72,332 56,377 ---------------------------------------------------------------------------- Operations Oil and NGLs (barrels per day) 3,345 3,182 3,084 3,029 3,268 Natural gas (MCF per day) 10,038 10,193 10,881 11,551 11,877 Total BOE per day (2) 5,018 4,881 4,898 4,954 5,245 ---------------------------------------------------------------------------- 2008 ---------------------------------------------------------------------------- Financial ($ 000s except $ per share/unit) Q4 Q3 Q2 Q1 ---------------------------------------------------------------------------- Revenue - realized oil and gas sales 22,613 34,226 34,398 30,493 Cash flow from operations 10,336 22,492 20,530 16,212 Per share/unit - basic 0.59 1.31 1.21 0.96 Per share/unit - diluted 0.59 1.30 1.20 0.96 Cash payments per share/unit (1) 0.62 0.96 0.84 0.70 Payout Ratio (1) 105% 73% 69% 73% Net earnings 10,585 21,125 12,912 10,804 Per share/unit - basic 0.62 1.23 0.76 0.64 Per share/unit - diluted 0.62 1.22 0.75 0.64 Capital expenditures and acquisitions 30,405 6,038 2,543 6,421 Total assets 265,301 150,120 153,247 150,169 Working capital deficiency 23,878 47,499 57,148 57,810 Bank debt 79,910 - - - Shareholders'/unitholders' equity 56,777 57,623 46,612 48,136 ---------------------------------------------------------------------------- Operations Oil and NGLs (barrels per day) 3,055 2,998 3,009 3,153 Natural gas (MCF per day) 8,817 7,233 7,272 7,139 Total BOE per day (2) 4,525 4,204 4,221 4,343 ---------------------------------------------------------------------------- (1) Cash payments per share/unit are based on payments made in respect of production months within the quarter. (2) BOE is calculated using a conversion ratio of 6 MCF to 1 barrel of oil. The conversion is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead and as such may be misleading if used in isolation. Production Three months ended March 31, December 31, March 31, 2010 2009 2009 ---------------------------------------------------------------------------- Crude oil and NGLs (barrels per day) 3,345 3,182 3,268 Natural gas (MCF per day) 10,038 10,193 11,877 ---------------------------------------------------------------------------- Average BOE per day 5,018 4,881 5,245 ---------------------------------------------------------------------------- Barrels of oil equivalent (BOE) are calculated using a conversion ratio of 6 MCF to 1 barrel of oil. The conversion is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead and as such may be misleading if used in isolation.Production volumes for the first quarter of 2010 decreased approximately four percent from Q1 2009. Natural gas production was lower because of deferral of projects due to low natural gas prices. In the fourth quarter of 2009, the Company disposed of the majority of its interest in the Shaunavon area of Saskatchewan resulting in a decrease of approximately 200 BOE per day. In addition, the Company disposed of its interest in the Pinto area of Saskatchewan in February resulting in a further reduction of approximately 35 BOE per day for the quarter. Production related to Bonterra's Q4 2009 drilling program resulted in a quarter over quarter increase of approximately three percent.The Company drilled nine gross (8.1 net) Pembina Cardium horizontal wells during the first quarter of 2010. Of these wells only one gross (one net) was on production prior to March 31, 2010. Of the remaining eight gross wells, two gross (two net) were on production as of April 1, 2010 and five gross (4.1 net) were on production as of May 1, 2010. The remaining horizontal well will be placed on production after spring breakup.With the new wells currently on production the Company's current production is in excess of 5,700 BOE per day. It is uncertain at what rate these new wells will decline at with the limited production history. Revenue Three months ended March 31, December 31, March 31, ($) 2010 2009 2009 ---------------------------------------------------------------------------- Revenue - oil and gas sales (000's) 27,248 24,946 19,300 Average Realized Prices: Crude oil and NGLs (per barrel) 74.88 68.40 45.80 Natural gas (per MCF) 5.11 4.76 5.19 ---------------------------------------------------------------------------- Revenue from petroleum and natural gas sales increased $7,948,000 from the corresponding 2009 quarter primarily due to a 63 percent increase in crude oil prices which was partially offset by a reduction in production. Quarter over quarter saw an increase in revenues of $2,302,000 due to increasing commodity prices and production volumes.The Company's product split on a revenue basis is approximately 83 percent weighted towards crude oil and NGLs. This ratio will further increase as the Company develops its Pembina Cardium horizontal program. Royalties Three months ended March 31, December 31, March 31, ($ 000s) except $ per BOE 2010 2009 2009 ---------------------------------------------------------------------------- Crown royalties 1,806 1,451 1,364 Freehold royalties, gross overriding royalties and net carried interests 1,025 892 501 ---------------------------------------------------------------------------- Total royalty expense 2,831 2,343 1,865 Percentage of revenue 10.4 9.4 9.7 $ per BOE 6.27 5.22 3.91 ---------------------------------------------------------------------------- Royalties paid by the Company consist primarily of Crown royalties paid to the Provinces of Alberta, Saskatchewan and British Columbia. Most of the Company's wells are low productivity wells and therefore have low Crown royalty rates. The Company's average Crown royalty rate is approximately 6.6 percent (2009 - 7.1 percent) and approximately 3.8 percent (2009 - 2.6 percent) for other royalties.The increase in the dollar amount and percentage of revenues for other royalties is due to several of the newly completed Pembina Horizontal wells being drilled on freehold lands. Freehold royalty rates averaged 17 percent compared to a five percent royalty rate for wells drilled on crown lands.ALBERTA GOVERNMENT COMPETITIVENESS REVIEWOn March 11, 2010, the Government of Alberta announced it will modify conventional oil and natural gas royalties effective January 2011 to increase Alberta's competitiveness in the upstream energy sector. The current five per cent front-end royalty rate on conventional oil and natural gas will become a permanent feature of the royalty system. The maximum royalty rate for conventional oil will be reduced to 40 percent from 50 percent. The maximum royalty rate for conventional and unconventional natural gas will be reduced at higher prices from 50 to 36 percent. Other royalty incentive programs will remain in effect. Additional analysis of royalties is ongoing and will be concluded prior to finalizing the royalty curves which is expected at the end of May 2010. Management believes these changes to the royalty system should have a positive effect on cashflow but must wait until the actual royalty curves are announced to confirm this. Production Costs Three months ended March 31, December 31, March 31, ($ 000s) except $ per BOE 2010 2009 2009 ---------------------------------------------------------------------------- Production costs 6,702 6,870 7,038 $ per BOE 14.84 15.30 14.74 ---------------------------------------------------------------------------- Total production costs in Q1 2010 have decreased by $336,000 over Q1 2009. The decrease is due to reduced production volumes (see Production). On a per BOE basis, production costs have remained relatively stable.The Company's production comes primarily from low productivity wells. These wells generally have higher production costs on a per unit-of-production basis as costs such as municipal taxes, surface leases, power and personnel costs are not variable with production volumes. The higher production costs for the Company are substantially offset by current low royalty rates of approximately 10.4 percent, which is much lower than industry average for conventional production and results in high cash netbacks on a combined basis.The Company continues to expect gross operating costs to be approximately $7,000,000 per quarter. However, increasing production volumes resulting from the Company's 2010 Pembina Cardium horizontal drilling program should result in a significant drop in production costs on a cost per BOE basis throughout the current year. General and Administrative (G&A) Expense Three months ended March 31, December 31, March 31, ($ 000s) except $ per BOE 2010 2009 2009 ---------------------------------------------------------------------------- G&A Expense 1,508 1,623 939 $ per BOE 3.34 3.61 1.97 ---------------------------------------------------------------------------- The increase in G&A expense year over year was primarily due to two factors. The principle reason for the increase was employee compensation resulting from accrued bonuses which increased approximately $428,000 in Q1 2010 compared to Q1 2009. The Company has a bonus plan that is based on three percent of earnings before taxes. The Company firmly believes that tying employee compensation (including the use of stock options) to the performance of the Company clearly aligns the interest of the employees to that of the shareholders as the employees are not given a bonus unless the Company earns a profit.The other contributing factor to the increase was a $188,000 increase in banking related costs. These costs are anticipated to decline due to lower standby rate charges on the Company's unused portion of its credit facility. The reduction is due to Bonterra reducing its debt to cash flow level (see below), as well as a reduction in standby rates due to the signing of an amended credit facility in April of 2010. Interest Expense Three months ended March 31, December 31, March 31, ($ 000s) except $ per BOE 2010 2009 2009 ---------------------------------------------------------------------------- Interest Expense 632 738 826 $ per BOE 1.40 1.64 1.75 ---------------------------------------------------------------------------- Interest charges decreased in Q1 2010 over Q1 2009 primarily due to a decrease in total outstanding debt balances of approximately 25 percent.Effective April 9, 2010, the Company renewed its bank facility under similar terms and conditions with the exception of extending the revolving period to April 27, 2012, reducing its interest and bank fees and amending one of the material covenants (see below).The interest rate on the renewed credit facility is calculated as follows: ---------------------------------------------------------------------------- Level I Level II Level III Level IV Level V ---------------------------------------------------------------------------- Consolidated Total Funded Debt (1) to Consolidated Cash Under Over 1.0:1 Over 1.5:1 Over 2.0:1 Over flow Ratio 1.0:1 to 1.5:1 to 2.0:1 to 2.5:1 2.5:1 ---------------------------------------------------------------------------- Canadian Prime Rate Plus (2) 100 150 175 200 250 ---------------------------------------------------------------------------- Bankers' Acceptances Rate Plus (2) 225 275 300 325 375 ---------------------------------------------------------------------------- (1) Consolidated total funded debt excludes related party amounts but includes working capital. (2) Numbers in table represent basis points. Consolidated total funded debt to consolidated cash flow ratio shall be adjusted effective as of the first day of the next fiscal quarter following the end of each fiscal quarter, with each such adjustment to be effective until the next such adjustment.As of March 31, 2010 the Company will continue to qualify for the Level I interest rates. The revised rates, resulting from the renewed banking agreement, will apply commencing April 9, 2010 resulting in a further reduction of 50 basis points in the cost of the Company's banker acceptance borrowings.The following is a list of the material covenants of the Company's bank facility:- The Company is required to not exceed $120,000,000 in consolidated debt (includes negative working capital but excludes debt to related parties). As of March 31, 2010 the Company had consolidated debt of $52,775,000.- Dividends paid in the current quarter and the three previous quarters shall not exceed 80 percent of the previous four quarters' cash flow as defined under GAAP. Dividend payments totaled $33,488,000 during the quarter and the three previous quarters while cash flow totaled $49,199,000 during the same period for an overall payout ratio of 68 percent.Stock-Based CompensationStock-based compensation is a statistically calculated value representing the estimated expense of issuing employee stock options. The Company records a compensation expense over the vesting period based on the fair value of options granted to employees, directors and consultants. Based on currently outstanding options, the Company anticipates that an expense of approximately $392,000 will be recorded for the balance of 2010, $206,000 in 2011 and $16,000 in 2012.Depletion, Depreciation, Accretion and Dry Hole CostsThe Company follows the successful efforts method of accounting for petroleum and natural gas exploration and development costs. Under this method, the costs associated with dry holes are charged to operations. For intangible capital costs that result in the addition of reserves, the Company depletes its oil and natural gas intangible assets using the unit-of-production basis by field.For tangible assets such as well equipment, the Company now uses a 10 percent declining basis for depreciation calculation. The Company changed from the straight line basis due to the increasing reserve life index which continues to indicate a longer service life for its production assets.Provision for depletion, depreciation and accretion was $4,791,000 and $4,614,000, respectively for the three month periods ending March 31, 2010 and March 31, 2009. The increase in the depletion amount was due primarily to increased average cost of reserves resulting from the lower percentage of proved reserves assigned to the Company's Pembina Cardium horizontal drilling with costs of approximately $11.00 per proven BOE. The Company has capital costs of approximately $6.70 (March 31, 2009 - $6.60) per proved BOE of reserves based on the December 31, 2009 independent engineering report.TaxesThe current tax provision relates to a resource surcharge of $46,000 (2009 - $53,000) payable by the Company to the Province of Saskatchewan. The resource surcharge is calculated as a flat percent of revenues generated from the sale of petroleum products produced in Saskatchewan. The resource surcharge rate is three percent in 2010. In 2009, a capital tax amount of $269,000 payable to the Province of Quebec was incurred due to the 2008 reorganization. The capital tax payable to the Province of Quebec was a one-time charge. Net Earnings Three months ended March 31, December 31, March 31, ($ 000s) except $ per share 2010 2009 2009 ---------------------------------------------------------------------------- Net earnings 12,040 52,136 6,093 $ per share - basic 0.64 2.88 0.35 $ per share - fully diluted 0.63 2.85 0.35 ---------------------------------------------------------------------------- Net earnings increased in the first three months of 2010 by $5,947,000 (97.6 percent) from the corresponding 2009 period. Increased revenues resulted from increased commodity prices that more than offset the production volume declines. The Company returned in excess of 40 percent of its gross realized revenues in net earnings. The Company's low capital costs combined with the Company's low production decline rates should allow for continued positive earnings even in a low commodity price environment.Two significant factors contributing to higher Q4 2009 net earnings were the Company's recordings of the investment tax credit recovery of $27,670,000 and the sale of a portion of the Company's Shaunavon production for a gain of $24,198,000. Excluding these items (net of the 29.15 percent tax effect), net earnings were $15,388,000 in the fourth quarter of 2009. The decline from this Q4 revised figure was principally due to future tax adjustments related to the windup of the Trust and corporate reorganization that occurred on January 1, 2010.Comprehensive IncomeOther comprehensive income for 2010 consists of an unrealized gain in its investment in Wild Stream Exploration Inc. and Comaplex Minerals Corp. (Comaplex) (a related party - see below) of $2,699,000 (2009 - $181,000) due to an increase in the share price of these entities. Cash Flow from Operations Three months ended March 31, December 31, March 31, ($ 000s) except $ per share 2010 2009 2009 ---------------------------------------------------------------------------- Cash flow from operations 15,073 10,336 6,632 $ per share - basic 0.81 0.76 0.38 $ per share - fully diluted 0.79 0.75 0.38 ---------------------------------------------------------------------------- First quarter 2010 cash flow from operations increased $8,441,000 or 128 percent compared to Q1 2009 primarily due to increased commodity prices received during the first three months of 2010 partially offset by lower production volumes. The quarter over quarter increase of $4,737,000 or 46 percent was due to both continuing increases in crude oil pricing as well as production increases.Cash NetbackThe following table illustrates the Company's cash netback from operations for the three month periods ended: March 31, December 31, March 31, $ per Barrel of Oil Equivalent (BOE) 2010 2009 2009 ---------------------------------------------------------------------------- Production volumes (BOE) 451,638 448,892 477,495 Gross production revenue $ 60.33 $ 55.50 $ 40.42 Royalties (6.27) (5.22) (3.91) Field operating costs (14.84) (15.30) (14.74) ---------------------------------------------------------------------------- Field netback 39.22 34.98 21.77 General and administrative (3.34) (3.61) (1.97) Interest and taxes (1.50) (1.80) (2.40) ---------------------------------------------------------------------------- Cash netback $ 34.38 $ 29.57 $ 17.40 ---------------------------------------------------------------------------- Related Party TransactionsThe Company holds 689,682 (December 31, 2009 - 689,682) common shares in Comaplex which have a fair market value as of March 31, 2010 of $5,517,000 (December 31, 2009 - $4,827,000). Comaplex is a publically traded mineral company on the Toronto Stock Exchange. The Company's ownership in Comaplex represents less than one percent of the issued and outstanding common shares of Comaplex. The Company has common directors and management with Comaplex.Comaplex paid a management fee to the Company of $90,000 (2009 - $82,500). Comaplex also shares office rental costs and reimburses the Company for costs related to employee benefits and office materials. In addition, Comaplex owns 204,633 (December 31, 2009 - 204,633) common shares in the Company. Services provided by the Company include executive services (chief executive officer, president and vice president, finance duties), accounting services, oil and gas administration and office administration. All services performed are charged at estimated fair value. At March 31, 2010, Comaplex owed the Company $108,000 (December 31, 2008 - $105,000).As of March 31, 2010, Comaplex has loaned the Company $12,000,000 (December 31, 2009 - $12,000,000). The loan is unsecured, bears interest at Canadian chartered bank prime less one quarter of a percent and has no set repayment terms. The loan can only be repaid should the Company have sufficient available borrowing limits under the Company's credit facility. Interest paid on this loan during the first quarter of 2010 was $59,000 (Q1 2009 - $3,000). This loan results in being a substantial benefit to Bonterra and to Comaplex. The interest paid to Comaplex by Bonterra is substantially lower than bank interest and for Comaplex the interest earned is substantially higher than Comaplex would receive by investing in bank instruments such as BA's or GIC's.The Company also has a management agreement with Pine Cliff Energy Ltd. (Pine Cliff). Pine Cliff has common directors and management with the Company. Pine Cliff trades on the TSX Venture Exchange. Pine Cliff paid a management fee to the Company of $22,500 (2009 - $30,000). Services provided by the Company include executive services (president and vice president, finance duties), accounting services, oil and gas administration and office administration. All services performed are charged at estimated fair value. The Company has no share ownership in Pine Cliff. As at March 31, 2010 the Company had an account receivable from Pine Cliff of $1,000 (December 31, 2009 - $1,000).As of March 31, 2010, the Company's CEO and major shareholder has loaned the Company $11,500,000 (December 31, 2009 - $11,500,000). The loan is unsecured, bears interest at Canadian chartered bank prime less one quarter of a percent and has no set repayment terms. The loan can only be repaid should the Company have sufficient available borrowing limits under the Company's credit facility. Interest paid on this loan during the first quarter of 2010 was $57,000 (2009 - $48,000). This loan results in being a substantial benefit to Bonterra and to the CEO. The interest paid to the CEO by Bonterra is substantially lower than bank interest and for the CEO the interest earned is substantially higher than the CEO would receive by investing in bank instruments such as BA's or GIC's.Liquidity and Capital ResourcesDuring the first three months of 2010, the Company incurred capital costs of $20,725,000 (2009 - $2,696,000) net of drilling credits. The costs relate primarily to the drilling, completing, tie-in and equipping of 9 (8.1 net) Pembina Cardium horizontal wells.The Company currently has plans to spend an estimated $50,000,000 net of drilling credits on its 2010 Pembina Cardium horizontal well program. Drilling is anticipated to recommence in June after spring breakup. Bonterra anticipates funding the 2010 capital program out of cash flow, proceeds from the exercise of employee stock options, sale of investments and the Company's line of credit.As of March 31, 2010 and December 31, 2009, the Company has a bank facility consisting of an $100,000,000 syndicated revolving credit facility and a $20,000,000 non-syndicated revolving credit facility. Amounts drawn under these facilities at March 31, 2010 were $63,097,000 (December 31, 2009 - $59,823,000). The interest rates on the outstanding debt as of March 31, 2010 were 4.00 percent and 3.65 percent on the Company's Canadian prime rate loan and Bankers' Acceptances, respectively. For information related to interest rate levels and material covenants please refer to the discussion under Interest Expense.Additional information relating to the Company may be found on www.sedar.com or visit our website at www.bonterraenergy.com.The following consolidated financial statements and notes to the consolidated financial statements have been provided for further details. CONSOLIDATED BALANCE SHEETS As at March 31, 2010 and December 31, 2009 (unaudited) ($ 000s) 2010 2009 ---------------------------------------------------------------------------- Assets Current Accounts receivable (Note 11) 17,212 14,713 Crude oil inventory 531 431 Prepaid expenses 3,064 3,247 Future income tax asset (Note 8) 11,342 11,889 Investments 6,892 4,462 Investments in related party (Note 3) 5,517 4,827 ---------------------------------------------------------------------------- 44,558 39,569 ---------------------------------------------------------------------------- Restricted cash (Note 4) 612 812 Investment tax credit receivable (Note 8) 27,670 27,670 Future income tax asset (Note 8) 48,969 58,265 Property and Equipment (Note 5) Petroleum and natural gas properties and related equipment 276,129 255,840 Accumulated depletion and depreciation (92,498) (88,169) ---------------------------------------------------------------------------- Net Property and Equipment 183,631 167,671 ---------------------------------------------------------------------------- 305,440 293,987 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Liabilities Current Accounts payable and accrued liabilities 25,866 18,868 Due to related parties (Note 6) 23,500 23,500 Deferred credit (Note 8) 8,370 7,363 ---------------------------------------------------------------------------- 57,736 49,731 ---------------------------------------------------------------------------- Bank debt (Note 7) 63,097 59,823 Deferred credit (Note 8) 41,692 47,769 Asset retirement obligations 17,523 17,790 ---------------------------------------------------------------------------- 180,048 175,113 ---------------------------------------------------------------------------- Shareholders' Equity (Note 9) Share capital 123,737 121,955 Contributed surplus 3,438 3,350 ---------------------------------------------------------------------------- 127,175 125,305 ---------------------------------------------------------------------------- Deficit (6,502) (8,451) Accumulated other comprehensive income (Note 10) 4,719 2,020 ---------------------------------------------------------------------------- (1,783) (6,431) ---------------------------------------------------------------------------- Total Shareholders' Equity 125,392 118,874 ---------------------------------------------------------------------------- 305,440 293,987 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Three Months Ended March 31 (unaudited) ($ 000s) 2010 2009 ---------------------------------------------------------------------------- Shareholders' equity, beginning of period 118,874 56,777 Comprehensive income for the period 14,739 6,274 Net capital contributions (Note 9) 1,728 - Stock-based compensation 142 229 Dividends declared (10,091) (6,903) ---------------------------------------------------------------------------- Shareholders' Equity, End of Period 125,392 56,377 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT For the Three Months Ended March 31 (unaudited) ($000s, except $ per Share) 2010 2009 ---------------------------------------------------------------------------- Revenue Oil and gas sales 27,248 19,300 Royalties (2,831) (1,865) Gain on sale of property 5,785 - Interest and other 12 66 ---------------------------------------------------------------------------- 30,214 17,501 Expenses Production costs 6,702 7,038 General and administrative 1,508 939 Interest on debt 632 826 Stock based compensation 142 229 Depletion, depreciation and accretion 4,791 4,614 ---------------------------------------------------------------------------- 13,775 13,646 ---------------------------------------------------------------------------- Earnings Before Taxes 16,439 3,855 ---------------------------------------------------------------------------- Taxes (Recovery) Current 46 322 Future 4,353 (2,560) ---------------------------------------------------------------------------- 4,399 (2,238) ---------------------------------------------------------------------------- Net Earnings for the Period 12,040 6,093 Deficit, beginning of period (8,451) (46,715) Dividends declared (10,091) (6,903) ---------------------------------------------------------------------------- Deficit, End of Period (6,502) (47,525) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net Earnings Per Share - Basic (Note 9) 0.64 0.35 Net Earnings Per Share - Diluted (Note 9) 0.63 0.35 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Three Months Ended March 31 (unaudited) ($ 000s, except $ per Share) 2010 2009 ---------------------------------------------------------------------------- Net Earnings for the Period 12,040 6,093 Other Comprehensive Income Unrealized gains on investments (net of income taxes of 2010 - $421, 2009 - $26) 2,699 181 ---------------------------------------------------------------------------- Other Comprehensive Income 2,699 181 ---------------------------------------------------------------------------- Comprehensive Income 14,739 6,274 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Comprehensive Income Per Share - Basic (Note 9) 0.79 0.36 Comprehensive Income Per Share - Diluted (Note 9) 0.77 0.36 CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31 (unaudited) ($000s) 2010 2009 ---------------------------------------------------------------------------- Operating Activities Net earnings for the period 12,040 6,093 Items not affecting cash Stock based compensation 142 229 Depletion, depreciation and accretion 4,791 4,614 Gain on sale of property (5,785) - Future income taxes 4,353 (2,560) ---------------------------------------------------------------------------- 15,541 8,376 ---------------------------------------------------------------------------- Change in non-cash working capital Accounts receivable (1,168) 1,096 Crude oil inventory (75) 316 Prepaid expenses 183 568 Accounts payable and accrued liabilities 510 (3,653) Restricted cash 200 - Asset retirement obligations settled (118) (71) ---------------------------------------------------------------------------- (468) (1,744) ---------------------------------------------------------------------------- Cash Provided by Operating Activities 15,073 6,632 ---------------------------------------------------------------------------- Financing Activities Increase (decrease) in debt 3,274 (3,852) Due to related parties - 16,000 Stock option proceeds 1,728 - Dividends (10,091) (6,903) ---------------------------------------------------------------------------- Cash Provided by (Used in) Financing Activities (5,089) 5,245 ---------------------------------------------------------------------------- Investing Activities Property and equipment expenditures (20,675) (2,696) Proceeds on sale of property 5,534 - Restricted term deposit - 20 Change in non-cash working capital Accounts payable and accrued liabilities 6,488 (9,201) Accounts receivable (1,331) - ---------------------------------------------------------------------------- Cash Used in Investing Activities (9,984) (11,877) ---------------------------------------------------------------------------- Net Cash Inflow - - Cash, beginning of period - - ---------------------------------------------------------------------------- Cash, End of Period - - ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Cash Interest Paid 632 826 Cash Taxes Paid 42 161 NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTSPeriods Ended March 31, 2010 and 2009 (unaudited)1. CHANGE OF ORGANIZATIONEffective January 1, 2010, the Trust was wound up into Bonterra Oil & Gas Ltd. and Bonterra Oil & Gas Ltd. was amalgamated with Bonterra Energy Corp. The continuing entity officially changed its name to Bonterra Energy Corp. (Bonterra or the Company) subsequent to finalizing the reorganization.2. SIGNIFICANT ACCOUNTING POLICIESThe accounting policies and methods of application followed in the preparation of the interim consolidated financial statements are the same as those followed in the preparation of Bonterra's 2009 annual consolidated financial statements except as described below. These interim consolidated financial statements do not include all disclosures required for annual consolidated financial statements. The interim consolidated financial statements as presented should be read in conjunction with the 2009 annual consolidated financial statements.Change in Accounting EstimatePetroleum and Natural Gas Properties and Related EquipmentOn January 1, 2010 the Company prospectively depreciated petroleum and natural gas plant and equipment using the declining balance method at 10 percent per year, from the straight-line method. The change of estimate was due to declining balance depreciation providing a better reflection of the estimated service life of the related assets. The Company incurred $456,000 less depreciation under the declining balance method, than under the straight-line method.Furniture, Equipment and OtherOn January 1, 2010 the Company prospectively depreciated these assets using the declining balance method at rates of 10 percent to 20 percent per year, from the straight-line method. The change of estimate was due to declining balance depreciation providing a better reflection of the estimated service life of the related assets. The Company incurred $23,000 less depreciation under the declining balance method, than under the straight-line method.Recent Accounting PronouncementsIn December 2008, the CICA issued Section 1582, "Business Combinations", which will replace former guidance on business combinations. Section 1582 establishes principles and requirements of the acquisition method for business combinations and related disclosures. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011 with earlier adoption permitted.In December 2008, the CICA issued Sections 1601, "Consolidated Financial Statements", and 1602, "Non-controlling Interests", which replaces existing Section 1600. Section 1601 establishes standards for the preparation of consolidated financial statements. Section 1602 provides guidance on accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. These standards are effective on or after the beginning of the first annual reporting period beginning on or after January 1, 2011 with earlier adoption permitted. Section 1602 currently does not impact the Company as it does not have any subsidiaries.The Canadian Accounting Standards Board has confirmed that IFRS will replace Canadian GAAP effective January 1, 2011, including comparatives for 2010, for Canadian publicly accountable enterprises.3. INVESTMENT IN RELATED PARTYThe investment consists of 689,682 (December 31, 2009 - 689,682) common shares in Comaplex Minerals Corp. (Comaplex), a company with common directors and management with the Company and its subsidiaries. The investment is recorded at fair market value. The common shares trade on the Toronto Stock Exchange under the symbol CMF. The investment represents less than one percent ownership in the outstanding shares of Comaplex. 4. RESTRICTED CASHAn escrow account was held by Silverwing prior to its acquisition by the Company. The escrow account was created to support eligible expenditures related to a farm-in agreement. The Company may access the funds upon completion and tie-in or abandonment and reclamation of 8 wells (December 31, 2009 - 11 wells). The funds are administered by the farmors' legal counsel. The funds in the escrow account are invested in interest bearing term deposits. 5. PROPERTY AND EQUIPMENT March 31, 2010 December 31, 2009 ---------------------------------------------------------------------------- Accumulated Accumulated Depletion and Depletion and ($ 000s) Cost Depreciation Cost Depreciation ---------------------------------------------------------------------------- Undeveloped land 6,251 - 7,992 - Petroleum and natural gas properties and related equipment 268,409 91,462 246,387 87,153 Furniture, equipment and other 1,469 1,036 1,461 1,016 ---------------------------------------------------------------------------- 276,129 92,498 255,840 88,169 ---------------------------------------------------------------------------- In February the Company disposed of its Southeast Saskatchewan Pinto property. The proceeds of disposition were $5,534,000 cash. At the time of disposition, the Company had a net book value of $120,000 for the property. It also had an asset retirement obligation of $371,000 that was transferred to the purchaser related to the property resulting in a gain on sale of property of $5,785,000.6. DUE TO RELATED PARTIESAs of March 31, 2010, the Company's CEO and major shareholder has loaned the Company $11,500,000 (December 31, 2009 - $11,500,000). The loan is unsecured, bears interest at Canadian chartered bank prime less one quarter of a percent and has no set repayment terms but is payable on demand. Interest paid on this loan during the first quarter of 2010 was $57,000 (Q1 2009 - $48,000).As of March 31, 2010, Comaplex has loaned the Company $12,000,000 (December 31, 2009 - $12,000,000). The loan is unsecured, bears interest at Canadian chartered bank prime less one quarter of a percent and has no set repayment terms but is payable on demand. Interest paid on this loan during the first quarter of 2010 was $59,000 (Q1 2009 - $3,000).The Company's bank agreement requires that the above loans can only be repaid should the Company have sufficient available borrowing limits under the Company's credit facilityPlease refer to Note 11 for additional related party transactions.7. BANK DEBTAs of March 31, 2010 and December 31, 2009, the Company has a bank facility consisting of a $100,000,000 syndicated revolving credit facility and a $20,000,000 non-syndicated revolving credit facility. Amounts drawn under the facility at March 31, 2010 were $63,097,000 (December 31, 2009 - $59,823,000). The interest rates on the outstanding debt as of March 31, 2010 were 4.00 percent and 3.65 percent on the Company's Canadian prime rate loan and Bankers' Acceptances, respectively. The terms of the syndicated revolving credit facility provided that the loan was revolving to April 28, 2011 and is subject to annual review. The revolving credit facility had no fixed payment requirements.Effective April 9, 2010, the Company renewed its bank facility under similar terms and conditions with the exception of extending the revolving period to April 27, 2012, reducing its interest and bank fees and amending one of the material covenants (see below).The amount available for borrowing under the credit facilities is reduced by outstanding letters of credit. Letters of credit totaling $285,000 were issued at March 31, 2010 (December 31, 2009 - $285,000). Security for the credit facilities consists of various fixed and floating demand debentures totaling $200,000,000 over all of the Company's assets, and a general security agreement with first ranking over all personal and real property. The interest rate on the new credit facility is calculated as follows: ---------------------------------------------------------------------------- Level I Level II Level III Level IV Level V ---------------------------------------------------------------------------- Consolidated Total Funded Debt (1) to Consolidated Cash Under Over 1.0:1 Over 1.5:1 Over 2.0:1 to Over flow Ratio 1.0:1 to 1.5:1 to 2.0:1 2.5:1 2.5:1 ---------------------------------------------------------------------------- Canadian Prime Rate Plus (2) 100 150 175 200 250 ---------------------------------------------------------------------------- Bankers' Acceptances Rate Plus(2) 225 275 300 325 375 ---------------------------------------------------------------------------- (1) Consolidated total funded debt excludes related party amounts but includes working capital. Consolidated cash flow is calculated as cash flow according to GAAP adjusted for non-cash working capital items. (2) Numbers in table represent basis points. Consolidated total funded debt to consolidated cash flow ratio shall be adjusted effective as of the first day of the next fiscal quarter following the end of each fiscal quarter, with each such adjustment to be effective until the next such adjustment.The following is a list of the material covenants:- The Company is required to not exceed $120,000,000 in consolidated debt (includes working capital but excludes debt to related parties).- Dividends paid in the current quarter and the three previous quarters shall not exceed 80 percent of the previous four quarters' cash flow as defined under GAAP.At March 31, 2010, the Company is in compliance with all covenants.8. TAXESThe Company has recorded a future income tax asset related to assets and liabilities and related tax amounts: March 31 December 31 ($ 000s) 2010 2009 ---------------------------------------------------------------------------- Future tax liability related to investments (391) (824) Future tax liability related to property and equipment (11,513) (5,855) Future tax asset related to asset retirement obligations 4,395 4,474 Future tax asset related to finance costs 649 802 Future tax asset related to corporate tax losses and SR&ED claims 55,438 59,668 Future tax asset related to corporate capital tax loss 17,882 17,883 Valuation adjustment (17,491) (17,883) ---------------------------------------------------------------------------- Future Tax Asset - Long-term 48,969 58,265 ---------------------------------------------------------------------------- Current portion of future income tax asset related to corporate tax losses and SR&ED claims 11,342 11,889 ---------------------------------------------------------------------------- Future Tax Asset - Current 11,342 11,889 ---------------------------------------------------------------------------- A reconciliation of the deferred credit is as follows: ($ 000s) ---------------------------------------------------------------------------- Amount recorded on reorganization 71,303 Amortized in 2008 (4,240) Amortized in 2009 (12,356) Rate adjustment 2009 425 ---------------------------------------------------------------------------- Balance as of December 31, 2009 55,132 Amortized in first quarter of 2010 (3,567) Rate adjustment 2010 (1,503) ---------------------------------------------------------------------------- Balance as of March 31, 2010 50,062 ---------------------------------------------------------------------------- Current portion 8,370 Long-term portion 41,692 ---------------------------------------------------------------------------- 50,062 ---------------------------------------------------------------------------- The Company has the following tax pools, which may be used to reduce taxable income in future years, limited to the applicable rates of utilization: ($ 000s) Rate of Utilization (%) Amount ---------------------------------------------------------------------------- Undepreciated capital costs 20-100 24,095 Eligible capital expenditures 7 7,265 Share issue costs 20 2,586 Canadian oil and gas property expenditures 10 21,308 Canadian development expenditures 30 72,868 Canadian exploration expenditures 100 11,140 SR&ED expenditures 100 71,350 Income tax losses carried forward (1) 100 222,560 ---------------------------------------------------------------------------- 433,172 ---------------------------------------------------------------------------- (1) Federal income tax losses carried forward expire in the following years; 2024 - $3,347,000, 2025 - $7,532,000, 2026 - $46,670,000, 2027 - $117,189,000, 2028 - $34,726,000, 2029 - $13,096,000. The Company has $27,670,000 (December 31, 2009 - $27,670,000) remaining of investment tax credits that expire in the following years; 2019 - $3,469,000, 2020 - $3,059,000, 2021 - $4,667,000, 2022 - $3,909,000, 2023 - $3,155,000, 2024 - $1,995,000, 2025 - $2,257,000, 2026 - $2,405,000, 2027 - $2,009,000, 2028 - $745,000.The Company also has $142,583,000 (December 31, 2009 - $143,061,000) of capital loss carry forwards which can only be claimed against taxable capital gains.The amount and timing of reversals of temporary differences will also depend on the Company's future operating results, and acquisitions and dispositions of assets and liabilities. A significant change in any of the preceding assumptions could materially affect the Company's estimate of the future income tax asset.9. SHAREHOLDERS' EQUITYAuthorizedThe Company is authorized to issue an unlimited number of common shares without nominal or par value. Issued Number Amount ($000s) ---------------------------------------------------------------------------- Common Shares Balance, January 1, 2010 18,619,641 121,955 Issued pursuant to Company share option plan 84,300 1,728 Transfer of contributed surplus to share capital - 54 ---------------------------------------------------------------------------- Balance, March 31, 2010 18,703,941 123,737 ---------------------------------------------------------------------------- The Company is authorized to issue an unlimited number of Class "A" redeemable Preferred Shares and an unlimited number of Class "B" Preferred Shares. There are currently no outstanding Class "A" redeemable preferred shares or Class "B" preferred shares.The number of common shares used to calculate diluted net earnings per share for the three month periods ended March 31 is as follows: 2010 2009 ---------------------------------------------------------------------------- Basic shares outstanding 18,682,248 17,257,603 Dilutive effect of share options 539,148 - ---------------------------------------------------------------------------- Diluted shares outstanding 19,221,396 17,257,603 ---------------------------------------------------------------------------- A summary of the changes of the Company's contributed surplus is presented below: Contributed surplus ($ 000s) 2010 2009 ---------------------------------------------------------------------------- Balance, beginning of period 3,350 2,542 Stock-based compensation expensed (non-cash) 142 229 Stock-based options exercised (non-cash) (54) - ---------------------------------------------------------------------------- Balance, end of period 3,438 2,771 ---------------------------------------------------------------------------- The deficit balance is composed of the following items: ($ 000s) March 31, 2010 March 31, 2009 ---------------------------------------------------------------------------- Accumulated earnings 288,785 214,275 Accumulated cash dividends/distributions (295,287) (261,800) ---------------------------------------------------------------------------- Deficit (6,502) (47,525) ---------------------------------------------------------------------------- The Company provides an option plan for its directors, officers, employees and consultants. Under the plan, the Company may grant options for up to 1,870,394 (December 31, 2009 - 1,861,964) common shares. The exercise price of each option granted equals the market price of the common shares on the date of grant and the option's maximum term is five years.A summary of the status of the Company's stock option plan as of March 31, 2010 and December 31, 2009, and changes during the three month and twelve month periods ended on those dates is presented below: March 31, 2010 December 31, 2009 ---------------------------------------------------------------------------- Weighted- Weighted- Average Average Options Exercise Price Options Exercise Price ---------------------------------------------------------------------------- Outstanding at beginning of period 1,330,900 $ 20.36 1,390,500 $ 20.50 Options granted 30,000 34.66 33,000 14.90 Options exercised (84,300) 20.50 (92,600) 20.50 ---------------------------------------------------------------------------- Outstanding at end of period 1,276,600 $ 20.69 1,330,900 $ 20.36 ---------------------------------------------------------------------------- Options exercisable at end of period 297,600 $ 20.29 370,900 $ 20.50 ---------------------------------------------------------------------------- The following table summarizes information about options outstanding at March 31, 2010: Options Outstanding Options Exercisable ---------------------------------------------------------------------------- Weighted- Average Weighted- Number Remaining Average Number Weighted- Range of Outstanding Contractual Exercise Exercisable Average Exercise Prices At 3/31/10 Life Price at 3/31/10 Price ---------------------------------------------------------------------------- $14.90 33,000 2.8 years $ 14.90 11,000 $ 14.90 20.50 1,213,600 2.7 years 20.50 286,600 20.50 34.66 30,000 2.8 years 34.66 - - ---------------------------------------------------------------------------- $14.90-$34.66 1,276,600 2.7 years $ 20.69 297,600 $ 20.29 ---------------------------------------------------------------------------- The Company records compensation expense over the vesting period based on the fair value of options granted to employees, directors and consultants. In 2010, the Company granted 30,000 stock options with an estimated fair value of $164,000 ($5.48 per option) using the Black-Scholes option pricing model with the following key assumptions: ---------------------------------------------------------------------------- Weighted-average risk free interest rate (%) 1.9 Expected life (years) 3.0 Weighted-average volatility (%) 33.0 Dividend yield 2010 based on the percentage of dividends paid during the period granted ---------------------------------------------------------------------------- 10. ACCUMULATED OTHER COMPREHENSIVE INCOME Other January 1, Comprehensive March 31, ($ 000s) 2010 Income 2010 ---------------------------------------------------------------------------- Unrealized gains on available-for-sale financial assets (net of tax) 2,020 2,699 4,719 ---------------------------------------------------------------------------- Other January 1, Comprehensive December 31, ($ 000s) 2009 Income 2009 ---------------------------------------------------------------------------- Unrealized gains on available-for-sale financial assets (net of tax) 1,420 600 2,020 ---------------------------------------------------------------------------- 11. RELATED PARTY TRANSACTIONSThe Company received a management fee from Comaplex of $90,000 (2009 - $82,500) for management services and office administration. This fee has been included as a recovery in general and administrative expenses. As at March 31, 2010, the Company had an account receivable from Comaplex of $108,000 (December 31, 2009 - $105,000).The Company received a management fee from Pine Cliff Energy Ltd. (Pine Cliff) of $22,500 (2009 - $30,000) for management services and office administration. This fee has been included as a recovery in general and administrative expenses. As at March 31, 2010 the Company had an account receivable from Pine Cliff of $1,000 (December 31, 2009 - $1,000).These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.12. FINANCIAL AND CAPITAL RISK MANAGEMENTFinancial Risk FactorsThe Company undertakes transactions in a range of financial instruments including:- Receivables- Restricted cash- Payables- Common share investments- Due to related parties- Bank loansThe Company's activities result in exposure to a number of financial risks including market risk (commodity price risk, interest rate risk, foreign exchange risk), credit risk, and liquidity risk.The Company's overall risk management program seeks to mitigate these risks and reduce the volatility on the Company's financial performance. Financial risk management is carried out by senior management under the direction of the Directors of the Company.The Company may enter into various risk management contracts in accordance with Board approval to manage the Company's exposure to commodity price fluctuations. Currently no risk management agreements are in place. The Company does not speculatively trade in risk management contracts. The Company's risk management contracts are entered into to manage the risks relating to commodity prices from its business activities.Capital Risk ManagementThe Company's objectives when managing capital, which the Company defines to include shareholders' equity, debt and working capital balances, are to safeguard the Company's ability to continue as a going concern, so that it can continue to provide returns to its shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends, debt facilities or issue new shares.The Company monitors capital on the basis of the ratio of debt to cash flow. This ratio is calculated using each quarter end net debt (total debt adjusted for working capital) and divided by the preceding twelve months cash flow. The Company believes that a debt level of approximately one and a half year's cash flow is an appropriate level to allow it to take advantage in the future of either acquisition opportunities or to provide flexibility to develop its undeveloped resources by horizontal or vertical drill programs.The following section (a) of this note provides a summary of the Company's underlying economic positions as represented by the carrying values, fair values and contractual face values of the Company's financial assets and financial liabilities. The Company's debt to cash flow from operations is also provided.The following section (b) addresses in more detail the key financial risk factors that arise from the Company's activities including its policies for managing these risks.The following section (c) provides details of the Company's risk management contracts that are used for financial risk management.a) Financial assets, financial liabilities and debt ratioThe carrying amounts, fair value and face values of the Company's financial assets and liabilities are shown in Table 1. Table 1 As at March 31, 2010 As at December 31, 2009 ---------------------------------------------------------------------------- Carrying Fair Face Carrying Fair Face ($ 000s) Value Value Value Value Value Value ---------------------------------------------------------------------------- Financial assets Accounts receivable 17,212 17,212 17,357 14,713 14,713 14,873 Investments 6,892 6,892 N/A 4,462 4,462 N/A Investments in related N/A N/A party 5,517 5,517 4,827 4,827 Restricted cash 612 612 612 812 812 812 Financial liabilities Accounts payable and accrued Liabilities 25,866 25,866 25,866 18,868 18,868 18,868 Due to related parties 23,500 23,500 23,500 23,500 23,500 23,500 Long-term debt 63,097 63,097 63,097 59,823 59,823 59,823 ---------------------------------------------------------------------------- Financial instruments consisting of accounts receivable, accounts payable and accrued liabilities, due to related parties and long-term debt carried on the consolidated balance sheet are carried at amortized cost. Restricted cash, investments, and investments in related party are carried at fair value. All of the fair value items are transacted in active markets. Bonterra classifies the fair value of these transactions according to the following hierarchy based on the amount of observable inputs used to value the instrument.Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions occur in sufficient frequency and volume to provide pricing information on an ongoing basis.Level 2 - Pricing inputs are other than quoted prices in active markets included in Level 1. Prices in Level 2 are either directly or indirectly observable as of the reporting date. Level 2 valuations are based on inputs, including quoted forward prices for commodities, time value and volatility factors, which can be substantially observed or corroborated in the marketplace.Level 3 - Valuations in this level are those with inputs for the asset or liability that are not based on observable market data.Bonterra's restricted cash, investments and investments in related party have been assessed on the fair value hierarchy described above and are all considered Level 1.The net debt and cash flow figures as of March 31, 2010 are presented in Table 2. Table 2 ($ 000s) March 31, 2010 ---------------------------------------------------------------------------- Long-term debt 63,097 Accounts payable and accrued liabilities 25,866 Due to related parties 23,500 Current assets (1) (33,216) ---------------------------------------------------------------------------- Net Debt 79,247 ---------------------------------------------------------------------------- Cash flow from operations (2) 47,384 ---------------------------------------------------------------------------- Net debt to cash flow from operations 1.67 ---------------------------------------------------------------------------- (1) Current assets include accounts receivable, crude oil inventory, prepaid expenses, investments and investment in related party. (2) Cash flow from operations includes annual net earnings less adjustment for stock-based compensation, depletion, depreciation and accretion, gain on sale of property, future income taxes, changes in non-cash working capital items, asset retirement obligations settled and investment tax credit receivable. b) Risks and mitigationsMarket risk is the risk that the fair value or future cash flow of the Company's financial instruments will fluctuate because of changes in market prices. Components of market risk to which the Company is exposed are discussed below.Commodity price riskThe Company's principal operation is the production and sale of crude oil, natural gas and natural gas liquids. Fluctuations in prices of these commodities directly impact the Company's performance and ability to continue with its dividends.The Company has used various risk management contracts to set price parameters for a portion of its production. Management, in agreement with the Board of Directors, recently decided that at least in the near term it will discontinue the use of commodity price agreements. The Company will assume full risk in respect of commodity prices.Interest rate riskInterest rate risk refers to the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes in market interest rates. Interest rate risk arises from interest bearing financial assets and liabilities that the Company uses. The principal exposure of the Company is on its borrowings which have a variable interest rate which gives rise to a cash flow interest rate risk.The Company's debt facilities consists of a $100,000,000 revolving operating line, $20,000,000 demand operating line and $23,500,000 due to related parties. The borrowings under these facilities are at bank prime plus or minus various percentages as well as by means of bankers' acceptances (BA's) within the Company's credit facility. The Company manages its exposure to interest rate risk through entering into various term lengths on its BA's but in no circumstances do the terms exceed six months.Sensitivity AnalysisBased on historic movements and volatilities in the interest rate markets and management's current assessment of the financial markets, the Company believes that a one percent variation in the Canadian prime interest rate is reasonably possible over a 12-month period.A one percent increase (decrease) in the Canadian prime rate would decrease net earnings and comprehensive income by $623,000 (increase by $623,000).Foreign exchange riskThe Company has no foreign operations and currently sells all its product sales in Canadian currency. The Company however is exposed to currency risk in that crude oil is priced in U.S. currency then converted to Canadian currency. The Company currently has no outstanding risk management agreements. Management, in agreement with the Board of Directors, decided that at least in the near term it will discontinue the use of commodity price agreements. The Company will assume full risk in respect of foreign exchange fluctuations.Credit riskCredit risk is the risk that a contracting party will not complete its obligations under a financial instrument and cause the Company to incur a financial loss. The Company is exposed to credit risk on all financial assets included on the balance sheet. To help mitigate this risk:- The Company only enters into material agreements with credit worthy counterparties. These include major oil and gas companies or major Canadian chartered banks;- Agreements for product sales are primarily on 30 day renewal terms; and- Investments are generally only with companies that have common management with the Company.Of the accounts receivable balance of March 31, 2010 ($17,212,000) and December 31, 2009 ($14,713,000) over 89 (2009 - 87) percent relates to product sales with international oil and gas companies and drilling credits receivable from the province of Alberta.The Company assesses quarterly, if there has been any impairment of the financial assets of the Company. The Company does have a credit risk exposure as the majority of the Company's accounts receivable are with counterparties having similar characteristics. However, payments from the Company's largest accounts receivable counterparties have consistently been received within 30 days and the sales agreements with these parties are cancellable with 30 days notice if payments are not received.At March 31, 2010 approximately $298,000 or approximately 1.7 percent (December 31, 2009, approximately $244,000 or 1.6 percent) of the Company's total accounts receivable are aged over 120 days and considered past due. The majority of these accounts are due from various joint venture partners. The Company actively monitors past due accounts and takes the necessary actions to expedite collection, which can include withholding production or netting payables when the accounts are with joint venture partners. Should the Company determine that the ultimate collection of a receivable is in doubt, it will provide the necessary provision in its allowance for doubtful accounts with a corresponding charge to earnings. If the Company subsequently determines an account is uncollectable, the account is written off with a corresponding charge to the allowance account. The Company's allowance for doubtful accounts balance at March 31, 2010 is $145,000 (December 31, 2009 - $160,000) with the difference being included in general and administrative expenses. There were no accounts written off during the year.The carrying value of accounts receivable approximates their fair value due to the relatively short periods to maturity on this instrument. The maximum exposure to credit risk is represented by the carrying amount on the balance sheet. There are no material financial assets that the Company considers past due.Liquidity riskLiquidity risk includes the risk that, as a result of the Company's operational liquidity requirements:- The Company will not have sufficient funds to settle a transaction on the due date;- The Company will not have sufficient funds to continue with its dividends;- The Company will be forced to sell assets at a value which is less than what they are worth; or- The Company may be unable to settle or recover a financial asset at all.To help reduce these risks the Company:- Maintains a portfolio of high-quality, long reserve life oil and gas assets.The Company has the following maturity schedule for its financial liabilities: Payments Due by Period ---------------------------------------------------------------------------- Recognized on Financial Less than 2-3 years 4-5 ($ 000s) Statements 1 year years ---------------------------------------------------------------------------- Accounts payable and accrued liabilities Yes - Liability 25,866 - - Due to related parties Yes - Liability 23,500 - - Long-term bank debt Yes - Liability - 63,097 - Office leases No 982 1,702 130 ---------------------------------------------------------------------------- Total 50,348 64,799 130 ---------------------------------------------------------------------------- c) Risk management contractsThe Company has no outstanding risk management contracts.13. SUBSEQUENT EVENTS - DIVIDENDSSubsequent to March 31, 2010, the Company declared a dividend of $0.21 per common share payable on April 30, 2009 to shareholders of record on April 15, 2009 and a dividend of $0.21 per common share payable on May 31, 2010 to shareholders of record on May 14, 2010.FOR FURTHER INFORMATION PLEASE CONTACT: Bonterra Energy Corp. George F. Fink CEO (403) 262-5307 (403) 265-7488 (FAX) or Bonterra Energy Corp. Garth E. Schultz Vice President, Finance and CFO (403) 262-5307 (403) 265-7488 (FAX) or Bonterra Energy Corp. Kirsten Kulyk Manager, Investor Relations (403) 262-5307 (403) 265-7488 (FAX) info@bonterraenergy.com www.bonterraenergy.com The TSX does not accept responsibility for the accuracy of this release.