The Globe and Mail

Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Globe Investor

News Sources

Take control of your investments with the latest investing news and analysis

Press release from Marketwire

Bonterra Energy Corp. Announces Second Quarter 2010 Results

Wednesday, August 11, 2010

Bonterra Energy Corp. Announces Second Quarter 2010 Results17:44 EDT Wednesday, August 11, 2010CALGARY, ALBERTA--(Marketwire - Aug. 11, 2010) - NOT FOR DISTRIBUTION TO U.S. NEWS WIRE SERVICES OR DISSEMINATION IN THE UNITED STATESBonterra Energy Corp. ("Bonterra" or the "Company") (www.bonterraenergy.com) (TSX:BNE) is pleased to announce its financial and operational results for the three months and six months ended June 30, 2010. HIGHLIGHTS Three months ended Six Months Ended ---------------------------------------------------------------------------- June 30, June 30, June 30, June 30, ($ 000s except $ per share/unit) 2010 2009 2010 2009 ---------------------------------------------------------------------------- FINANCIAL Revenue - oil and gas sales 29,191 20,501 56,439 39,801 Funds flow (1) 17,550 9,780 38,876 18,156 Per share - basic 0.94 0.55 2.08 1.04 Per share - diluted 0.91 0.55 2.02 1.04 Payout ratio (2) 68% 73% 58% 73% Cash flow from operations 16,644 9,238 31,717 15,875 Per share - basic 0.89 0.52 1.70 0.91 Per share - diluted 0.86 0.52 1.65 0.91 Payout ratio (2) 72% 77% 71% 83% Cash dividends per share (2) 0.64 0.40 1.21 0.76 Net earnings 10,887 4,544 22,927 10,637 Per share - basic 0.58 0.26 1.22 0.61 Per share - diluted 0.56 0.26 1.19 0.61 Capital expenditures and acquisitions net of disposals 10,994 2,255 26,135 4,956 Total assets 307,934 258,393 Working capital deficiency 2,281 13,989 Long-term debt 78,434 71,573 Shareholders' equity 126,045 72,332 ---------------------------------------------------------------------------- OPERATIONS Oil and NGLs - barrels per day 3,874 3,029 3,611 3,148 - average price ($ per barrel) 71.09 59.77 72.84 52.56 Natural gas - MCF per day 11,157 11,551 10,600 11,713 - average price ($ per MCF) 3.97 3.64 4.51 4.42 Total barrels of oil equivalent per day (BOE) (3) 5,733 4,954 5,378 5,100 ---------------------------------------------------------------------------- (1) 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 and investments, adjustments of investment tax credit receivable and excluding restricted cash recoveries and asset retirement expenditures. (2) Cash payments per share are based on payments made in respect of production months within the quarter. (3) 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. REPORT TO SHAREHOLDERSBonterra Energy Corp. ("Bonterra" or "the Company") is pleased to report its operating and financial results for the three months and six months ended June 30, 2010. OperationsBonterra remained focused on its operations during the quarter and continued to achieve encouraging results in its Pembina Cardium horizontal drill program and achieved record level production volumes despite having substantial delays in Q2 2010 due to weather conditions. Production in the second quarter of 2010 increased 14 percent quarter over quarter and 16 percent compared with the second quarter of 2009 to 5,733 barrels of oil equivalent (BOE) per day, a new high for the Company. The increase is mainly attributable to the production additions associated with the horizontal drill program in the Company's core Pembina Cardium holdings. These additions served to not only substantially increase overall volumes but also offset natural production declines and the impact of the Company's divestiture program in Q4 2009 and Q1 2010 whereby the company sold approximately 270 BOE per day of production. Based on these results, Bonterra will maintain its forecast for 2010 average daily production to exceed 5,700 BOE per day.Bonterra's capital expenditures during the first six months of 2010 totaled approximately $31.7 million net of drilling credits. The costs related primarily to the drilling and completion of 10 gross (9.1 net) Pembina Cardium wells. The second quarter is typically less active for the Company due to spring break-up and this quarter was no exception with an exceptionally wet season that caused additional delays after road bans were terminated. As such, the majority of drilling activity has been planned for the second half of the year. Following a mid-year review of Bonterra's development program, the Board of Directors and management made the determination to increase the full year program from the original budget of $50 million to $65 million in recognition of additional development opportunities available in the Company's Pembina Cardium horizontal drilling program. Bonterra has one of the highest-quality asset bases in the Canadian energy industry with approximately 85 percent of corporate reserves on a Proved plus Probable basis in the Pembina Cardium field, Canada's largest original-oil-in-place pool. The Company has a 14 year drilling inventory with over 435 gross locations identified including approximately 80 horizontal drill locations in the halo area of the pool and numerous horizontal and vertical locations in the main pool. The Company currently anticipates drilling a further 13 gross (11.6 net) operated and four gross (0.6 net) non-operated Pembina Cardium horizontal wells in the third and fourth quarters of this year. To date, Bonterra has focused primarily in drilling horizontal wells outside of the main Pembina field. In the second half of 2010, Bonterra will be involved as a 15 percent working interest partner in a four-well horizontal program in the main pool. This program and the drill programs presently being conducted in the main pool by other companies will greatly assist Bonterra in its selection of drill locations in the main pool. FinancialOil prices decreased slightly quarter over quarter but have increased significantly when compared to the second quarter of 2009. The Company's average realized price for crude oil and natural gas liquids was $71.09 in the second quarter of 2009 versus $74.88 recorded during the first quarter of the year and $52.56 in the same period last year. Fairly stable crude oil prices during the quarter were partially offset by a decline in natural gas prices from $5.11 per MCF in Q1 2010 to $3.97 per MCF in Q2 2010. Despite the lower pricing environment, Bonterra recorded a 10 percent increase in cash flow from operations quarter over quarter and an 80 percent increase over the same period in 2010 mainly due to the increase in production volumes, lower operating costs and lower general and administrative expense. As a result, Bonterra was able to increase dividends to shareholders during the second quarter. The payout ratio was 68 percent of funds flow from operations. Dividends to shareholders during the quarter totaled $0.64 per share which included an increase to the current level of $0.22 per share beginning with the month of June dividend that was paid on July 30, 2010. Dividends can and may fluctuate in the future. Funds flow is derived mainly from producing and selling oil, natural gas and related products and as such, it is highly dependent on commodity prices. Bonterra's board of directors will continue to examine dividends on a monthly basis while considering overall market conditions to set the dividend level each month.OutlookBonterra has built a strategic land position in the Pembina Cardium field. The 2010 capital program will continue to target its high return horizontal drilling program and improvements in ongoing operations. The Company is also continuing to assess opportunities for the acquisition of producing and non-producing properties in Western Canada. Taking this approach should allow the Company to sustain its strong dividend policy while ensuring the long-term growth and sustainability of its business. 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) Q2 Q1 Q4 Q3 Q2 Q1 ---------------------------------------------------------------------------- Revenue - oil and gas sales 29,191 27,248 24,946 20,965 20,501 19,300 Cash flow from operations 16,644 15,073 13,668 9,350 9,238 6,637 Per share - basic 0.89 0.81 0.76 0.50 0.52 0.38 Per share - diluted 0.86 0.79 0.75 0.50 0.52 0.38 Cash distributions (1) 0.64 0.57 0.50 0.44 0.40 0.36 Payout Ratio (1) 72% 70% 66% 87% 77% 94% Net earnings 10,887 12,040 52,136 5,790 4,544 6,093 Per share - basic 0.58 0.64 2.88 0.32 0.26 0.35 Per share - diluted 0.56 0.63 2.85 0.32 0.26 0.35 Capital expenditures and acquisitions net of disposals 10,994 15,141 (16,976) 17,660 2,255 2,701 Total assets 307,934 305,440 293,987 273,543 258,393 260,732 Working capital deficiency 2,281 13,178 10,162 14,455 13,989 14,909 Bank debt 78,434 63,097 59,823 81,386 71,573 89,383 Shareholders' equity 126,045 125,392 118,874 74,025 72,332 56,377 ---------------------------------------------------------------------------- Operations Oil and NGLs (barrels per day) 3,874 3,345 3,182 3,084 3,029 3,268 Natural gas (MCF per day) 11,157 10,038 10,193 10,881 11,551 11,877 Total BOE per day (2) 5,733 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 net of disposals 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 Six months ended ended June 30, March 31, June 30, June 30, June 30, 2010 2010 2009 2010 2009 ---------------------------------------------------------------------------- Crude oil and NGLs (barrels per day) 3,874 3,345 3,029 3,611 3,148 Natural gas (MCF per day) 11,157 10,038 11,551 10,600 11,713 ---------------------------------------------------------------------------- Average BOE per day 5,733 5,018 4,954 5,378 5,100 ---------------------------------------------------------------------------- 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 half of 2010 were up 5.5 percent over the corresponding 2009 period. An increase in production volumes related to Bonterra's Q1 2010 horizontal drilling resulted in a quarter over quarter production gain of 14.3 percent even after replacement of approximately 270 barrels per day of property divestments in Q4 2009 and Q1 2010.During the second quarter, a non-operated natural gas plant, to which Bonterra delivers a portion of its natural gas, reached capacity and resulted in the shut in of a few of the Company's gas wells. The amount of shut in natural gas as of June 30, 2010 was between 400 to 500 MCF per day. The Company is currently reviewing alternatives to either redirecting this natural gas production or participating with the other owners in the plant in the expansion of the facility.The Company drilled ten gross (9.1 net) Pembina Cardium horizontal wells during the first half of 2010 (1 gross and net in Q2 2010). Of these wells all but two gross (two net) were on production prior to June 30, 2010. One of the remaining wells commenced production as of July 13, 2010 with the other well anticipated to be on production at the end of Q3 2010. Commencing in mid June, 2010, Bonterra had two drill rigs active on its horizontal Cardium drill program. Revenue Three months Six Months ended Ended June 30, March 31, June 30, June 30, June 30, ($) 2010 2010 2009 2010 2009 ---------------------------------------------------------------------------- Revenue - oil and gas sales (000's) 29,191 27,248 20,501 56,439 39,801 Average Realized Prices: Crude oil and NGLs (per barrel) 71.09 74.88 59.77 72.84 52.56 Natural gas (per MCF) 3.97 5.11 3.64 4.51 4.42 ---------------------------------------------------------------------------- Revenue from petroleum and natural gas sales increased $16,638,000 in the first half of 2010 from the corresponding period in 2010 primarily due to a 38.6 percent increase in crude oil prices and a 14.7 percent increase in crude oil production. Quarter over quarter saw an increase in revenues of $1,943,000 due to increased production volumes which were partially offset by reduced commodity prices. The Company's product split on a revenue basis is approximately 85 percent weighted towards crude oil and NGLs. This ratio will further increase as the Company develops its Pembina Cardium horizontal program. Royalties Three months Six Months ended Ended June 30, March 31, June 30, June 30, June 30, ($ 000s except $ per BOE) 2010 2010 2009 2010 2009 ---------------------------------------------------------------------------- Crown royalties 1,757 1,806 674 3,563 2,038 Freehold royalties, gross overriding royalties and net carried interests 1,052 1,025 587 2,077 1,088 ---------------------------------------------------------------------------- Total royalty expense 2,809 2,831 1,261 5,640 3,126 % of total revenue 9.6 10.4 6.2 10.0 7.9 $ per BOE 5.38 6.27 2.76 5.79 3.35 ---------------------------------------------------------------------------- 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 6.3 percent (2009 - 5.2 percent) and approximately 3.7 percent (2009 - 2.7 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. Management believes these changes to the royalty system should have a positive effect on cash flow. Production Costs Three months Six Months ended Ended June 30, March 31, June 30, June 30, June 30, ($ 000s except $ per BOE) 2010 2010 2009 2010 2009 ---------------------------------------------------------------------------- Production costs 6,981 6,702 7,355 13,683 14,393 $ per BOE 13.38 14.84 16.12 14.06 15.41 ---------------------------------------------------------------------------- Total production costs in the first half of 2010 have decreased by $710,000 over the first half of 2009. The decrease is due to a reduction of approximately $830,000 in repair and maintenance costs offset partially by an increase in trucking costs. On a per BOE basis, production costs have declined in the first half of 2010 compared to the same period in 2009 mainly due to higher production volumes from the Company's horizontal Cardium wells that result in much lower costs per BOE from these wells. Quarter over quarter saw an increase of $279,000 resulting primarily from increased natural gas processing charges due to higher production levels. The Company's production comes primarily from low productivity wells. These wells generally have higher production costs on a per unit-of-production basis as costs such as municipal taxes, surface leases, power and personnel costs are not variable with production volumes. The higher production costs for the Company are substantially offset by current low royalty rates of approximately 10 percent, which is much lower than industry average for conventional production and results in high cash netbacks on a combined basis. General and Administrative (G&A) Expense Three months ended Six Months Ended ($ 000s except $ June 30, March 31, June 30, June 30, June 30, per BOE) 2010 2010 2009 2010 2009 ---------------------------------------------------------------------------- G&A Expense 1,226 1,508 1,108 2,734 2,047 $ per BOE 2.35 3.34 2.43 2.81 2.19 ---------------------------------------------------------------------------- The increase in G&A expense year over year was primarily due to increased employee compensation resulting from accrued bonuses which increased approximately $725,000 in the first half of 2010 compared to the first half of 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.Quarter over quarter saw a decrease of $282,000 related primarily to reduced employee compensation resulting from a reduced bonus accrual and a reduction in legal and bank fees. Interest Expense Three months ended Six Months Ended ($ 000s except $ June 30, March 31, June 30, June 30, June 30, per BOE) 2010 2010 2009 2010 2009 ---------------------------------------------------------------------------- Interest Expense 619 632 915 1,251 1,741 $ per BOE 1.19 1.40 2.01 1.29 1.86 ---------------------------------------------------------------------------- Interest charges decreased in the first half of 2010 over the corresponding 2009 period primarily due to an approximate one percent decrease in the average interest rate charged on the Company's outstanding debt balance. The interest rate decrease is due to a reduced bank rate resulting from a better debt to cash flow ratio and to increases in loans from related parties which have a lower interest rate than bank loans.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 Under Over 1.0:1 Over 1.5:1 Over 2.0:1 Over Cash 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 calculated each fiscal quarter and the interest rates adjusted effective as of the first day of the fiscal quarter commencing immediately after the fiscal quarter in which Bonterra files a compliance certificate containing the ratio, with each such adjustment to be effective until the next such adjustment.As of June 30, 2010 the Company will continue to qualify for the Level I interest rates. The revised rates, resulting from the renewed banking agreement, applied commencing April 9, 2010 resulting in a 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 June 30, 2010 the Company had consolidated debt of $57,215,000.- 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 $38,581,000 during the quarter and the three previous quarters while cash flow totaled $56,746,000 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 $250,000 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 $10,009,000 and $9,523,000, respectively for the six month periods ending June 30, 2010 and June 30, 2009. The increase in the depletion amount was due primarily to increased production volumes. The Company has capital costs of approximately $6.70 (June 30, 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 $81,000 (2009 - $129,000) payable 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 $269,000 payable to the Province of Quebec was incurred due to the 2008 reorganization for the conversion from a Trust to a Corporation. The capital tax payable to the Province of Quebec was a one-time charge. Net Earnings Three months Six Months ended Ended June 30, March 31, June 30, June 30, June 30, ($ 000s except $ per share) 2010 2010 2009 2010 2009 ---------------------------------------------------------------------------- Net Earnings 10,887 12,040 4,544 22,927 10,637 $ per share - basic 0.58 0.64 0.26 1.22 0.61 $ per share - fully diluted 0.56 0.63 0.26 1.19 0.61 ---------------------------------------------------------------------------- Net earnings increased in the first six months of 2010 by $12,290,000 from the corresponding 2009 period. Increased revenues resulting from increased crude oil prices combined with a 14.7 percent increase in crude oil and NGL production volumes were the main reasons for the increase. The Company returned in excess of 35 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.The three months ended June 30, 2010 saw a decline of $1,153,000 in net earnings from the first three months of 2010. The Q2 decrease from Q1 net earnings was primarily due to the recording in Q1 of a $5,785,000 gain on sale of property. Q2 saw greater revenues and reduced future tax provision which partially offset the Q1 gain on sale of property.Comprehensive IncomeOther comprehensive income for 2010 consists of an unrealized gain in its investments of $3,607,000 (2009 - $818,000) due to an increase in the share price of these entities. Also during the quarter the Company disposed of a portion of its investments resulting in a realized gain, net of tax, of $14,000. Cash Flow from Operations Three months Six Months ended Ended June 30, March 31, June 30, June 30, June 30, ($ 000s) 2010 2010 2009 2010 2009 ---------------------------------------------------------------------------- Cash flow from operations 16,644 15,073 9,238 31,717 15,875 $ per share - basic 0.89 0.81 0.52 1.70 0.91 $ per share - fully diluted 0.86 0.79 0.52 1.65 0.91 ---------------------------------------------------------------------------- First half 2010 cash flow from operations increased 99.8 percent compared to first half 2009 due to increased crude oil prices and increased production. The quarter over quarter cash flow increase of $1,571,000 was due primarily to increased production volumes offset partially by reduced commodity pricing.Cash NetbackThe following table illustrates the Company's cash netback from operations for the six month periods ended June 30: $ per Barrel of Oil Equivalent (BOE) 2010 2009 ---------------------------------------------------------------------------- Production volumes (BOE) 973,374 933,781 Gross production revenue $ 57.98 $ 42.62 Royalties (5.79) (3.35) Field operating costs (14.06) (15.41) ---------------------------------------------------------------------------- Field netback 38.13 23.86 General and administrative (2.81) (2.19) Interest and taxes (1.37) (2.29) ---------------------------------------------------------------------------- Cash netback $ 33.95 $ 19.38 ---------------------------------------------------------------------------- The following table illustrates the Company's cash netback from operations for the three month periods ended: June 30, March 31, $ per Barrel of Oil Equivalent (BOE) 2010 2010 ---------------------------------------------------------------------------- Production volumes (BOE) 521,736 451,638 Gross production revenue $ 55.95 $ 60.33 Royalties (5.38) (6.27) Field operating costs (13.38) (14.84) ---------------------------------------------------------------------------- Field netback 37.19 39.22 General and administrative (2.35) (3.34) Interest and taxes (1.25) (1.50) ---------------------------------------------------------------------------- Cash netback $ 33.59 $ 34.38 ---------------------------------------------------------------------------- Related Party TransactionsThe Company owned 689,682 (December 31, 2009 - 689,682) common shares in Comaplex which had a fair market value as of June 30, 2009 of $7,587,000 (December 31, 2009 - $4,827,000). Effective July 6, 2010, Comaplex was acquired by Agnico-Eagle Mines Limited (Agnico). In exchange for its Comaplex common shares, Bonterra received 108,693 common shares in Agnico and 689,682 common shares in Geomark Exploration Ltd. (Geomark) (a Company with common directors and management). The common shares of Agnico trade on the Toronto Stock Exchange under the symbol AEM and the common shares of Geomark trade on the TSX Venture Exchange under the symbol GME. The investment in Geomark represents 1.3 percent ownership in the outstanding common shares of Geomark.Comaplex paid a management fee to the Company of $180,000 (2009 - $165,000). Comaplex also shared office rental costs and reimburses the Company for costs related to employee benefits and office materials. In addition, Comaplex owned 204,633 (December 31, 2009 - 204,633) common shares in the Company. Services provided by the Company included executive services (chief executive officer, president and vice president, finance duties), accounting services, oil and gas administration and office administration. All services performed were charged at estimated fair value. At June 30, 2010, Comaplex owed the Company $82,000 (December 31, 2009 - $105,000).As of June 30, 2010, Comaplex had loaned the Company $12,000,000 (December 31, 2009 - $12,000,000). The loan was unsecured, bears interest at Canadian chartered bank prime less one quarter of a percent and had no set repayment terms. Effective May 1, 2010, the interest rate was reduced to Canadian chartered bank prime less 5/8ths of a percent. The reduction in rate was due to the lowering of the Company's bank interest rate caused by the amending of the Company's bank agreement (see Interest Expense section).The loan cannot be repaid, or demanded to be paid by Comaplex, unless the Company has sufficient available borrowing limits under the Company's credit facility. Interest paid on this loan during the first six months of 2010 was $114,000 (2009 - $79,000). 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.As a result of the acquisition of Comaplex by Agnico, the above management agreement, loan agreement and Bonterra common shares were transferred to Geomark. The only amendment to these agreements was a reduction in the monthly management fee from $30,000 to $22,500.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 $45,000 (2009 - $60,000). Services provided by the Company include executive services (CEO, 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. At June 30, 2010, the Company had an account receivable from Pine Cliff of $1,000 (December 31, 2009 - $1,000).As of June 30, 2010, the Company's CEO and major shareholder has loaned the Company $11,500,000 (December 31, 2009 - $11,500,000). The Company repaid $750,000 of the outstanding loan in July, 2010. The loan is unsecured, bears interest at Canadian chartered bank prime less one quarter of a percent and has no set repayment terms. Effective May 1, 2010 the interest rate was decreased to Canadian chartered bank prime less 5/8ths percent. The reduction in rate was due to the lowering of the Company's bank interest rate caused by the amending of the Company's bank agreement (see Interest Expense section). The loan cannot be repaid, or demanded to be paid by the Company's CEO, unless the Company has sufficient available borrowing limits under the Company's credit facility. Interest paid on this loan during the first six months of 2010 was $109,000 (2009 - $101,000). 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 six months of 2010, the Company incurred capital costs of $31,669,000 (2009 - $4,956,000) net of drilling tax credits. The costs relate primarily to the drilling, completing, tie-in and equipping of 10 gross (9.1 net) Pembina Cardium horizontal wells. The Company currently has plans to spend an estimated $65,000,000 net of drilling credits on its 2010 Pembina Cardium horizontal well program (an increase of $15,000,000 from its previously announced budget). This includes the drilling of a further 13 gross (11.6 net) operated and four gross (0.6 net) non-operated Pembina Cardium horizontal wells in the third and fourth quarters of 2010. 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 June 30, 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 these facilities at June 30, 2010 were $78,434,000 (December 31, 2009 - $59,823,000). The interest rates on the outstanding debt as of June 30, 2010 were 3.5 percent and 2.9 percent on the Company's Canadian prime rate loan and Bankers' Acceptances, respectively. For information related to interest rate levels and material covenants please refer to the discussion under Interest Expense. Additional information relating to the Company may be found on www.sedar.com or visit our website at www.bonterraenergy.com.The following consolidated financial statements and notes to the consolidated financial statements have been provided for further details. CONSOLIDATED BALANCE SHEETS As at June 30, 2010 and December 31, 2009 (unaudited) ($ 000s) 2010 2009 ---------------------------------------------------------------------------- Assets Current Accounts receivable (Note 11) 15,633 14,713 Crude oil inventory 386 431 Prepaid expenses 2,683 3,247 Future tax asset (Note 8) 10,735 11,889 Investment 5,689 4,462 Investment in related party (Note 3) 7,587 4,827 ---------------------------------------------------------------------------- 42,713 39,569 ---------------------------------------------------------------------------- Restricted cash (Note 4) - 812 Investment tax credit receivable (Note 8) 27,670 27,670 Future tax asset (Note 8) 47,876 58,265 Property and Equipment (Note 5) Petroleum and natural gas properties and related equipment 287,121 255,840 Accumulated depletion and depreciation (97,446) (88,169) ---------------------------------------------------------------------------- Net Property and Equipment 189,675 167,671 ---------------------------------------------------------------------------- 307,934 293,987 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Liabilities Current Accounts payable and accrued liabilities 12,498 18,868 Due to related parties (Note 6) 23,500 23,500 Deferred credit (Note 8) 8,996 7,363 ---------------------------------------------------------------------------- 44,994 49,731 Bank debt (Note 7) 78,434 59,823 Deferred credit (Note 8) 40,814 47,769 Asset retirement obligations 17,647 17,790 ---------------------------------------------------------------------------- 181,889 175,113 ---------------------------------------------------------------------------- Shareholders' Equity (Note 9) Share capital 124,307 121,955 Contributed surplus 3,542 3,350 ---------------------------------------------------------------------------- 127,849 125,305 ---------------------------------------------------------------------------- Deficit (7,417) (8,451) Accumulated other comprehensive income (Note 10) 5,613 2,020 ---------------------------------------------------------------------------- (1,804) (6,431) ---------------------------------------------------------------------------- Total Shareholders' Equity 126,045 118,874 ---------------------------------------------------------------------------- 307,934 293,987 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the periods ended June 30 (unaudited) Three Months Six Months ($ 000s) 2010 2009 2010 2009 ---------------------------------------------------------------------------- Shareholders' equity, beginning of period 125,392 56,377 118,874 56,777 Comprehensive income for the period 11,781 5,181 26,520 11,455 Net capital contributions (Note 9) 532 17,243 2,260 17,243 Stockbased compensation 142 239 284 468 Dividends declared (11,802) (6,708) (21,893) (13,611) ---------------------------------------------------------------------------- Shareholders' Equity, End of Period 126,045 72,332 126,045 72,332 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT For the periods ended June 30 (unaudited) Three Months Six Months ($ 000s, except $ per Share) 2010 2009 2010 2009 ---------------------------------------------------------------------------- Revenue Oil and gas sales 29,191 20,501 56,439 39,801 Royalties (2,809) (1,261) (5,640) (3,126) Gain on sale of property - - 5,785 - Interest and other 29 (6) 41 60 ---------------------------------------------------------------------------- 26,411 19,234 56,625 36,735 ---------------------------------------------------------------------------- Expenses Production costs 6,981 7,355 13,683 14,393 General and administrative 1,226 1,108 2,734 2,047 Interest on debt 619 915 1,251 1,741 Stockbased compensation 142 239 284 468 Depletion, depreciation and accretion 5,218 4,909 10,009 9,523 ---------------------------------------------------------------------------- 14,186 14,526 27,961 28,172 ---------------------------------------------------------------------------- Earnings Before Taxes 12,225 4,708 28,664 8,563 ---------------------------------------------------------------------------- Taxes (Recovery) Current 35 76 81 398 Future 1,303 88 5,656 (2,472) ---------------------------------------------------------------------------- 1,338 164 5,737 (2,074) ---------------------------------------------------------------------------- Net Earnings for the Period 10,887 4,544 22,927 10,637 Deficit, beginning of period (6,502) (47,525) (8,451) (46,715) Dividends declared (11,802) (6,708) (21,893) (13,611) ---------------------------------------------------------------------------- Deficit, End of Period (7,417) (49,689) (7,417) (49,689) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net Earnings Per Share - Basic (Note 9) 0.58 0.26 1.22 0.61 ---------------------------------------------------------------------------- Net Earnings Per Share - Diluted (Note 9) 0.56 0.26 1.19 0.61 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Periods Ended June 30 (unaudited) Three Months Six Months ($ 000s, except $ per Share) 2010 2009 2010 2009 ---------------------------------------------------------------------------- Net Earnings for the Period 10,887 4,544 22,927 10,637 ---------------------------------------------------------------------------- Unrealized gains on investments (net of Income taxes; Three months ended 2010 - $146, 2009 - $108; Six months ended 2010 - $571, 2009 - $134) 908 637 3,607 818 Realized gains on investments transferred to net earnings (net of Income taxes; Three months ended 2010 - $3, 2009 - $Nil; Six months ended 2010 - $3, 2009 - $Nil) (14) - (14) - ---------------------------------------------------------------------------- Other Comprehensive Income (Loss) 894 637 3,593 818 ---------------------------------------------------------------------------- Comprehensive Income 11,781 5,181 26,520 11,455 ---------------------------------------------------------------------------- Comprehensive Income Per Share - Basic (Note 9) 0.63 0.29 1.42 0.66 ---------------------------------------------------------------------------- Comprehensive Income Per Share - Diluted (Note 9) 0.61 0.29 1.38 0.66 ---------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS For the periods ended June 30 (unaudited) Three Months Six Months ($ 000s) 2010 2009 2010 2009 ---------------------------------------------------------------------------- Operating Activities Net earnings for the period 10,887 4,544 22,927 10,637 Items not affecting cash Stock-based compensation 142 239 284 468 Depletion, depreciation and accretion 5,218 4,909 10,009 9,523 Gain on sale of property - - (5,785) - Gain on sale of investments (17) - (17) - Future income taxes 1,303 88 5,656 (2,472) ---------------------------------------------------------------------------- 17,533 9,780 33,074 18,156 ---------------------------------------------------------------------------- Change in non-cash working capital Accounts receivable 1,188 104 20 1,200 Crude oil inventory 102 (17) 27 299 Prepaid expenses 381 (814) 564 (246) Accounts payable and accrued liabilities (3,070) 243 (2,560) (3,410) Restricted cash 612 - 812 5 Asset retirement obligations settled (102) (58) (220) (129) ---------------------------------------------------------------------------- (889) (542) (1,357) (2,281) ---------------------------------------------------------------------------- Cash Provided by Operating Activities 16,644 9,238 31,717 15,875 ---------------------------------------------------------------------------- Financing Activities Increase (decrease) in debt 15,337 (17,810) 18,611 (21,662) Due to related parties - - - 16,000 Issue of shares pursuant to private placement - 17,996 - 17,996 Share issue costs - (1,011) - (1,011) Stock option proceeds 532 - 2,260 - Dividends (11,802) (6,708) (21,893) (13,611) ---------------------------------------------------------------------------- Cash Provided by (Used in) Financing Activities 4,067 (7,533) (1,022) (2,288) ---------------------------------------------------------------------------- Investing Activities Property and equipment expenditures (10,994) (2,255) (31,669) (4,956) Proceeds on sale of property - - 5,534 - Proceeds on sale of investments 190 - 190 - Restricted term deposit - - - 20 Change in non-cash working capital Accounts receivable 391 - (940) - Accounts payable and accrued liabilities (10,298) 550 (3,810) (8,651) ---------------------------------------------------------------------------- Cash Used in Investing Activities (20,711) (1,705) (30,695) (13,587) ---------------------------------------------------------------------------- Net Cash Inflow - - - - Cash, beginning of period - - - - ---------------------------------------------------------------------------- Cash, End of Period - - - - ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Cash Interest Paid 619 861 1,251 1,687 Cash Taxes Paid 45 31 87 192 NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTSAs at June 30, 2010 and for the three and six month periods ended June 30, 2010 and 2009 (unaudited)1. CHANGE OF ORGANIZATIONEffective January 1, 2010, Bonterra Energy Income 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 began depreciating petroleum and natural gas plant and equipment using the declining balance method at 10 percent per year, a change 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. During the first six months of 2010, the Company incurred $1,056,000 (Q1 2010 - $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 began depreciating these assets using the declining balance method at rates of 10 percent to 20 percent per year, a change 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. During the first six months of 2010, the Company incurred $70,000 (Q1 2010 - $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. The investment is recorded at fair market value.Effective July 6, 2010 Comaplex was acquired by Agnico-Eagle Mines Limited (Agnico). In exchange for Bonterra's 689,682 common shares in Comaplex, the Company received 689,682 shares in Geomark Exploration Ltd. (Geomark) (a company with directors and management common to those of Bonterra) and 108,693 common shares in Agnico. The common shares of Agnico trade on the Toronto Stock Exchange under the symbol AEM and the common shares of Geomark trade on the Venture exchange under the symbol GME. The investment in Geomark represents 1.3 percent ownership in the outstanding common shares of Geomark.4. RESTRICTED CASHAn escrow account was held by Silverwing Energy Inc., prior to its acquisition by the Company in 2008. The escrow account was created to support eligible expenditures related to a farm-in agreement. All necessary expenditures have been completed and the funds have been paid to the Company. 5. PROPERTY AND EQUIPMENT June 30, 2010 December 31, 2009 ---------------------------------------------------------------------------- Accumulated Accumulated Depletion and Depletion and ($ 000s) Cost Depreciation Cost Depreciation ---------------------------------------------------------------------------- Undeveloped land 6,072 - 7,992 - Petroleum and natural gas properties and related equipment 279,577 96,389 246,387 87,153 Furniture, equipment and other 1,472 1,057 1,461 1,016 ---------------------------------------------------------------------------- 287,121 97,446 255,840 88,169 ---------------------------------------------------------------------------- In February 2010, 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 related to the property of $371,000 that was transferred resulting in a gain on sale of property of $5,785,000.6. DUE TO RELATED PARTIESAs of June 30, 2010, the Company's CEO and major shareholder has loaned the Company $11,500,000 (December 31, 2009 - $11,500,000). Subsequent to June 30, 2010, the Company repaid $750,000 of the outstanding loan. 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 half of 2010 was $109,000 (2009 - $101,000).As of June 30, 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 half of 2010 was $114,000 (2009 - $79,000).Effective May 1, 2010 the interest rate on the above loans was reduced to Canadian chartered bank prime less 5/8ths of a percent.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 facility. As of June 30, 2010 the Company has sufficient room to repay all balances.As a result of the acquisition by Agnico of Comaplex on July 6, 2010, the loan has been transferred to Geomark and is repayable by the Company under the same terms and conditions.Please refer to Note 11 for additional related party transactions.7. BANK DEBTAs of June 30, 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 June 30, 2010 were $78,434,000 (December 31, 2009 - $59,823,000). Interest paid on the bank loan during the first half of 2010 was $1,028,000 (2009 - $1,561,000). The interest rates on the outstanding debt as of June 30, 2010 were 3.5 percent and 2.9 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 is revolving to April 28, 2011 and is subject to annual review. The revolving credit facility has no fixed payment requirements.Effective April 9, 2010, the Company renewed its bank facility 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 June 30, 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 Under Over 1.0:1 Over 1.5:1 Over 2.0:1 to Over Cash 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 excluding adjustments for non-cash working capital items. (2) Numbers in table represent basis points. Consolidated total funded debt to consolidated cash flow ratio shall be calculated each fiscal quarter and the interest rates adjusted effective as of the first day of the fiscal quarter commencing immediately after the fiscal quarter in which Bonterra files a compliance certificate containing the ratio, 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 $120,000,000 in consolidated debt (includes working capital but excludes debt to related parties).- Dividends paid in the current quarter and the three previous quarters shall not exceed 80 percent of the previous four quarters' cash flow as defined under GAAP excluding adjustments for non-cash working capital items.At June 30, 2010, the Company is in compliance with all covenants. 8. TAXES The Company has recorded a future tax asset related to assets and liabilities and related tax amounts: June 30 December 31 ($ 000s) 2010 2009 ---------------------------------------------------------------------------- Future tax liability related to investments (576) (824) Future tax liability related to property and equipment (11,551) (5,855) Future tax asset related to asset retirement obligations 4,425 4,474 Future tax asset related to finance costs 606 802 Future tax asset related to corporate tax losses, ITC's and SR&ED claims 54,396 59,668 Future tax asset related to corporate capital tax loss 17,875 17,883 Valuation adjustment (17,299) (17,883) ---------------------------------------------------------------------------- Future Tax Asset - Long-term 47,876 58,265 ---------------------------------------------------------------------------- Current portion of future income tax asset related to corporate tax losses and SR&ED claims 10,735 11,889 ---------------------------------------------------------------------------- Future Tax Asset - Current 10,735 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) Amortized in second quarter of 2010 (1,461) Rate adjustment 2010 (294) ---------------------------------------------------------------------------- Balance as of June 30, 2010 49,810 ---------------------------------------------------------------------------- Current portion 8,996 Long-term portion 40,814 ---------------------------------------------------------------------------- 49,810 ---------------------------------------------------------------------------- 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: Rate of ($ 000s) Utilization (%) Amount ---------------------------------------------------------------------------- Undepreciated capital costs 20-100 24,262 Eligible capital expenditures 7 7,107 Share issue costs 20 2,199 Canadian oil and gas property expenditures 10 20,798 Canadian development expenditures 30 79,499 Canadian exploration expenditures 100 11,140 SR&ED expenditures 100 59,485 Income tax losses carried forward (1) 100 222,596 ---------------------------------------------------------------------------- 427,086 ---------------------------------------------------------------------------- (1) Federal income tax losses carried forward expire in the following years; 2024 - $3,347,000, 2025 - $7,532,000, 2026 - $46,671,000, 2027 - $117,189,000, 2028 - $34,726,000, 2029 - $13,131,000. 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 $142,548,000 (December 31, 2009 - $143,061,000) of capital loss carry forwards which can only be claimed against taxable capital gains.The amount and timing of reversals of temporary differences will also depend on the Company's future operating results, and acquisitions and dispositions of assets and liabilities. A significant change in any of the preceding assumptions could materially affect the Company's estimate of the future income tax asset. 9. SHAREHOLDERS' EQUITY Authorized The Company is authorized to issue an unlimited number of common shares without nominal or par value. Amount Issued Number ($ 000s) ---------------------------------------------------------------------------- Common Shares Balance, January 1, 2010 18,619,641 121,955 Issued pursuant to Company share option plan 113,300 2,260 Transfer of contributed surplus to share capital - 92 ---------------------------------------------------------------------------- Balance, June 30, 2010 18,732,941 124,307 ---------------------------------------------------------------------------- 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 and six month periods ended June 30 is as follows: Three Months Six Months 2010 2009 2010 2009 ---------------------------------------------------------------------------- Basic shares outstanding 18,730,338 17,668,372 18,706,426 17,464,122 Dilutive effect of share options 530,073 28,735 534,756 14,447 ---------------------------------------------------------------------------- Diluted shares outstanding 19,260,411 17,697,107 19,241,182 17,478,569 ---------------------------------------------------------------------------- A summary of the changes in 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) 284 468 Stock-based options exercised (non-cash) (92) - ---------------------------------------------------------------------------- Balance, end of period 3,542 3,010 ---------------------------------------------------------------------------- The deficit balance is composed of the following items: June 30, June 30, ($ 000s) 2010 2009 ---------------------------------------------------------------------------- Accumulated earnings 299,671 218,819 Accumulated cash dividends/distributions (307,088) (268,508) ---------------------------------------------------------------------------- Deficit (7,417) (49,689) ---------------------------------------------------------------------------- The Company provides an option plan for its directors, officers, employees and consultants. Under the plan, the Company may grant options for up to 1,873,294 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 June 30, 2010 and December 31, 2009, and changes during the six month and twelve month periods ended on those dates is presented below: June 30, 2010 December 31, 2009 ---------------------------------------------------------------------------- Weighted- Weighted- Average Average Exercise Exercise Options Price Options 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 (113,300) 19.96 (92,600) 20.50 ---------------------------------------------------------------------------- Outstanding at end of period 1,247,600 $ 20.74 1,330,900 $ 20.36 ---------------------------------------------------------------------------- Options exercisable at end of period 268,600 $ 20.50 370,900 $ 20.50 ---------------------------------------------------------------------------- The following table summarizes information about options outstanding at June 30, 2010: Options Outstanding Options Exercisable ---------------------------------------------------------------------------- Weighted- Average Weighted- Weighted- Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices At 6/30/10 Life Price at 6/30/10 Price ---------------------------------------------------------------------------- $14.90 22,000 2.5 years $14.90 - $ - 20.50 1,195,600 2.4 years 20.50 268,600 20.50 34.66 30,000 2.5 years 34.66 - - ---------------------------------------------------------------------------- $14.90-$34.66 1,247,600 2.4 years $20.74 268,600 $20.50 ---------------------------------------------------------------------------- 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 ($5.48 per option) using the Black-Scholes option pricing model with the following key assumptions: ---------------------------------------------------------------------------- Weighted-average risk free interest rate (%) 1.9 Expected life (years) 3.0 Weighted-average volatility (%) 33.0 Dividend yield 2010 based on the percentage of dividends paid during the period granted ---------------------------------------------------------------------------- 10. ACCUMULATED OTHER COMPREHENSIVE INCOME Other January 1, Comprehensive June 30, ($ 000s) 2010 Income 2010 ---------------------------------------------------------------------------- Unrealized gains on available-for-sale financial assets (net of tax of $914) 2,020 3,593 5,613 ---------------------------------------------------------------------------- Other January 1, Comprehensive December 31, ($ 000s) 2009 Income 2009 ---------------------------------------------------------------------------- Unrealized gains on available-for-sale financial assets (net of tax of $347) 1,420 600 2,020 ---------------------------------------------------------------------------- 11. RELATED PARTY TRANSACTIONSThe Company received a management fee from Comaplex of $180,000 (2009 - $165,000) for management services and office administration. This fee has been included as a recovery in general and administrative expenses. At June 30, 2010, the Company had an account receivable from Comaplex of $82,000 (December 31, 2009 - $105,000). Effective July 6, 2010, the Company cancelled its management agreement with Comaplex due to its takeover by Agnico.A new management agreement was entered into with Geomark effective July 6, 2010, under the same terms and conditions as those of the Comaplex agreement except that the monthly fee is $22,500 compared to Comaplex's monthly fee of $30,000.The Company received a management fee from Pine Cliff Energy Ltd. (Pine Cliff) of $45,000 (2009 - $60,000) for management services and office administration. This fee has been included as a recovery in general and administrative expenses. At June 30, 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, and 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 June 30, 2010 As at December 31, 2009 ---------------------------------------------------------------------------- Carrying Fair Face Carrying Fair Face ($ 000s) Value Value Value Value Value Value ---------------------------------------------------------------------------- Financial assets Accounts receivable 15,633 15,633 15,749 14,713 14,713 14,873 Investment 5,689 5,689 N/A 4,462 4,462 N/A Investment in related N/A N/A party 7,587 7,587 4,827 4,827 Restricted cash - - - 812 812 812 Financial liabilities Accounts payable and accrued Liabilities 12,498 12,498 12,498 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 78,434 78,434 78,434 59,823 59,823 59,823 ---------------------------------------------------------------------------- Financial instruments consisting of accounts receivable, restricted cash, accounts payable and accrued liabilities, due to related parties and long-term debt are carried on the consolidated balance sheet at amortized cost. Investment 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 investment 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 June 30, 2010 are presented in Table 2. Table 2 ($ 000s) June 30, 2010 ---------------------------------------------------------------------------- Long-term debt 78,434 Accounts payable and accrued liabilities 12,498 Due to related parties 23,500 Current assets (1) (31,978) ---------------------------------------------------------------------------- Net Debt 82,454 ---------------------------------------------------------------------------- Cash flow from operations (2) 54,735 ---------------------------------------------------------------------------- Net debt to cash flow from operations 1.51 ---------------------------------------------------------------------------- (1) Current assets include accounts receivable, crude oil inventory, prepaid expenses, investment and investment in related party. (2) Cash flow from operations includes the previous 12 months net earnings less adjustment for stock-based compensation, depletion, depreciation and accretion, gain on sale of property and investments, future income taxes, changes in non-cash working capital items, asset retirement obligations settled, restricted cash 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, decided that 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 Canadian chartered 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 increase (decrease) net earnings and comprehensive income by $734,000.Foreign exchange riskThe Company has no foreign operations and currently sells all of its product sales in Canadian currency. The Company is, however, 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. Investments not in related companies are reviewed continuously for value and are considered held only for short term periods.Of the accounts receivable balance at June 30, 2010 ($15,633,000) and December 31, 2009 ($14,713,000) over 92 percent (2009 - 87) 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 June 30, 2010 approximately $284,000 or approximately 1.8 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 June 30, 2010 is $116,000 (December 31, 2009 - $160,000) with the difference being included in general and administrative expenses. There were no accounts written off during the period.The carrying value of accounts receivable approximates their fair value due to the relatively short periods to maturity on this instrument. The maximum exposure to credit risk is represented by the carrying amount on the balance sheet. There are no material financial assets that the Company considers past due.Liquidity riskLiquidity risk includes the risk that, as a result of the Company's operational liquidity requirements:- The Company will not have sufficient funds to settle a transaction on the due date;- The Company will not have sufficient funds to continue with its dividends;- The Company will be forced to sell assets at a value which is less than what they are worth; or- The Company may be unable to settle or recover a financial asset at all.To help reduce these risks the Company:- Maintains a portfolio of high-quality, long reserve life oil and gas assets.The Company has the following maturity schedule for its financial liabilities: Payments Due by Period ---------------------------------------------------------------------------- Recognized on Financial Less than 4-5 ($ 000s) Statements 1 year 2-3 years years ---------------------------------------------------------------------------- Accounts payable and accrued liabilities Yes - Liability 12,498 - - Due to related parties Yes - Liability 23,500 - - Long-term bank debt Yes - Liability - 78,434 - Office leases No 946 1,695 173 ---------------------------------------------------------------------------- Total 36,944 80,129 173 ---------------------------------------------------------------------------- c) Risk management contractsThe Company has no outstanding risk management contracts.13. SUBSEQUENT EVENT - DIVIDENDSSubsequent to June 30, 2010, the Company declared a dividend of $0.22 per common share payable on July 30, 2010 to shareholders of record on July 15, 2010 and a dividend of $0.22 per common share payable on August 31, 2010 to shareholders of record on August 16, 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.