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Press release from Marketwire

C&C Energia Ltd. Announces Second Quarter 2010 Operating and Financial Results

Thursday, August 12, 2010

C&C Energia Ltd. Announces Second Quarter 2010 Operating and Financial Results08:22 EDT Thursday, August 12, 2010CALGARY, ALBERTA--(Marketwire - Aug. 12, 2010) - C&C Energia Ltd. ("C&C Energia" or the "Corporation") (TSX:CZE) is pleased to report its unaudited interim operating and financial results for the three and six months ended June 30, 2010.C&C Energia reported record results for the second quarter 2010 highlighted by a 81% increase in average daily production from the second quarter 2009 to 5,561 barrels of oil per day ("bopd"), funds flow from operations of US$20.6 million and net income of US$10.5 million. Production continues to increase with current production rates, of approximately 7,000 bopd. The Corporation estimates that full-year production should average between 5,600 and 5,700 bopd based on the year-to-date average production rates combined with the current production rate, assuming no significant additional production comes on-stream and taking into account natural production declines. C&C Energia has a strong balance sheet with a US$62.8 million adjusted working capital surplus and no debt. This financial flexibility allows the corporation to execute its largest capital program to-date in 2010.(All references to $ are to United States dollars unless otherwise noted.)Second Quarter 2010 HighlightsOperationsThe Corporation has been engaged in an active drilling and exploration program over the past six months.- From January to June 30, 2010, in the Llanos Basin in Colombia, the Corporation drilled 11 wells (7.5 net), six wells on the Cravoviejo block (100% participating interest) and five wells on the Cachicamo block (30% participating interest). Since June 30, 2010, the Corporation has drilled two (1.3 net) additional wells on these blocks and plans to drill an additional 2 or 3 wells on Cravoviejo over the next 60 days. The Corporation currently is drilling the Baco-1 well on the Morpho block in the Middle Magdalena Valley of Colombia to a planned depth of 12,700 feet.- Since the beginning of January, the Corporation has successfully tested a total of 12 wells (8.5 net) of which 7 wells (7 net) are on production, while 5 wells (1.5 net) on the Cachicamo block are still awaiting tie-in to production facilities.- Current production levels are approximately 7,000 barrels of oil per day ("bopd"), with approximately an additional 600 bopd awaiting tie-in. The Corporation expects these volumes to be on production late in the fourth quarter of 2010 on the Cachicamo block due to seasonal construction delays. Over 95% of the current production comes from the Corporation-operated Cravoviejo block in the Llanos Basin.- On July 28, 2010, the Corporation spudded the Baco-1 well on the Morpho block in the Middle Magdalena Valley (50% participating interest) where it intends to test the intermediate (10,000 ft. - 12,700 ft.) sandstone reservoirs identified in the Zeus-1 well, drilled, but not tested, by Ecopetrol in 2008. This well is expected to take approximately 60 to 70 days to reach total depth, with completion and testing to follow, subject to drilling results.- The Corporation also plans to test several of the shallow (4,600 ft. - 6,700 ft.) sands as identified and tested as oil-bearing in the Morpho-1 well, drilled by the Corporation in 2009. A service rig will be moved to the Morpho-1 location and up to four zones will be stimulated to determine the commercial potential of these sands. The program is expected to commence in October and take 30 - 45 days.- The Corporation has commenced the tendering process for the major contracts for its production facilities project on the Cravoviejo block.- The Corporation completed the drilling of the Carrizales 8 horizontal well (at Cravoviejo), which has been tied-in and has been producing in excess of 400 bopd for the past two months.- In the Llanos Basin, a seismic program has been ongoing on two blocks. A 120km2 3D seismic program was completed in May on the Pajaro Pinto block and the same seismic crew currently is conducting two 3D programs totalling 240km2 on the Llanos 19 block. The Corporation will use the data from these seismic programs to further define and delineate 5 or 6 exploration prospects which will begin drilling in 2011.- On August 5, 2010, the Corporation converted the Andaquies block (103,388 net acres) from a technical evaluation agreement to an E&P contract with the signing of a definitive agreement with the National Agency of Hydrocarbons (the "ANH").- The Corporation was selected as the successful bidder for the right to explore for oil and natural gas on two blocks in Colombia at the June 22, 2010 exploration bid round.- VMM-21 is an approximately 119,000 acre block in the Middle Magdalena Valley in central Colombia. The bid for the block was submitted by C&C Energia as the Operator for a 100% participating interest and is subject to the execution of an exploration and production contract (an "E&P Contract") with the ANH in Colombia, which is expected to be finalized by the end of September 2010. The Corporation has made a total work commitment of US$13.6 million for seismic and drilling. The Corporation also bid a 2% "x-factor", which equates to an incremental royalty on production from the block.- The Corporation and its partner, VETRA Exploration and Production Colombia S.A. ("VETRA"), were selected as the successful bidders for the right to explore for oil and natural gas on Putumayo Block-8, an approximately 103,000 acre block in the Putumayo Basin in southern Colombia. C&C Energia and VETRA (together the Consortium") each hold a 50% participating interest, with VETRA being the Operator. The selection is subject to the execution of an E&P Contract with the ANH, which is expected to be finalized by the end of September 2010. The Consortium made a total work commitment of US$20.9 million for seismic and drilling. The Consortium also bid a 2% "x-factor".Financial- Net income in the second quarter of 2010 was $10.5 million compared to net loss of ($7.5 million) in the second quarter of 2009.- Funds flow from operations in the second quarter of 2010 was $20.6 million compared to $6.5 million for the second quarter of 2009.- Adjusted working capital surplus at June 30, 2010 was $62.8 million compared to $12.6 million as at December 31, 2009, including cash amounting to $74.3 million (December 31, 2009 - $14.2 million). The increase in working capital is primarily due to the successful completion of the Corporation's CDN $65.0 million initial public offering resulting in US$54.9 million in net proceeds. Highlights Three Three Six Six Months Months Months Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, (unaudited) 2010 2009 2010 2009 ---------------------------------------------------------------------------- Financial (thousands of US $, except share and per share amounts) Oil revenues (net) 33,054 12,591 51,362 22,854 Funds flow from operations(1) 20,647 6,480 29,851 14,760 Net income 10,464 (7,541) 14,152 (9,758) Capital expenditures 24,467 3,144 40,557 9,320 Adjusted working capital surplus (2) 62,759 419 62,759 419 Common shares outstanding Basic 54,297,503 43,150,029 54,297,503 43,150,029 Diluted 55,096,437 - 55,096,437 - Weighted average common shares outstanding Basic 47,560,019 43,150,029 45,367,206 43,150,029 Diluted 47,674,298 - 45,424,661 - Share trading (CDN$) High 8.19 N/A 8.19 N/A Low 6.70 N/A 6.70 N/A Close 7.33 N/A 7.33 N/A Operational Average production (3) Crude oil (bbls/d) 5,561 3,072 5,069 3,263 Average reference price WTI ($ per bbl) 77.25 59.71 78.03 51.59 Operating netback ($ per bbl) (4) Average realized price (5) 74.83 53.50 73.21 47.43 Royalties 10.16 7.12 10.51 6.47 Transportation expenses 13.42 16.68 13.67 13.56 Production expenses 9.15 3.86 8.78 3.35 ---------------------------------------------------------------------------- Operating netback 42.10 25.84 40.25 23.95 ---------------------------------------------------------------------------- Note: (1) Funds flow from operations before changes in other non-cash items. See Management Discussion and Analysis - "GAAP and Non-GAAP Measures". (2) Current assets less current liabilities excluding risk management and future taxes. See Management Discussion and Analysis - "GAAP and Non-GAAP Measures". (3) Actual production sold for the three and six months ended June 30, 2010 was 5,617 bopd and 4,526 bopd, respectively (2009 - 2,984 bopd and 3,146 bopd). (4) Excludes impact of risk management contracts. See Management Discussion and Analysis - "GAAP and Non-GAAP Measures". (5) Effective January 1, 2010, the Corporation began selling its Cravoviejo block oil production to HOCOL, S.A. ("HOCOL"), a subsidiary of Ecopetrol. The sales agreement with HOCOL differs from previous sales agreements in that title transfer occurs when the oil is exported through the Covenas terminal, compared to previous agreements where title transfer occurred when the oil was delivered to the pipeline loading station. As a result, the Corporation will report higher revenue and higher transportation expenses. Capital ExpendituresDuring the second quarter of 2010, the Corporation invested approximately $24.5 million. Drilling and completion accounted for approximately $16.6 million, with $12.4 million and $4.2 million on the Cravoviejo and Cachicamo blocks respectively. Approximately $1.8 million was invested to enhance production rates with the installation of higher volume oil pumps. The Corporation also invested approximately $2.7 million in facilities on Cravoviejo, $2.6 million on seismic programs on the Pajaro Pinto and Llanos 19 blocks and $0.8 million in capitalized General and Administration and office costs.OutlookSince the first quarter of 2010, the Corporation has increased its production by approximately 55%, added new exploration blocks, completed 50% of its new 3D seismic programs in the Llanos Basin, successfully installed subsurface water disposal systems on its Cravoviejo Block, and spudded a deep exploration test (Baco-1) in the Middle Magdalena Valley.For the balance of 2010, the Corporation intends to spend approximately $50 million. These expenditures are for:1) The drilling of four (3.5 net) additional wells (including the Baco-1 well);2) The re-entry, stimulation and testing of the Morpho-1 well;3) Equipping and tie-in of at least five (1.5 net) wells at Cachicamo;4) The acquisition of over 175 km of 2D seismic to be shot on two blocks in the Putumayo basin (Andaquies and Putumayo Block 8);5) The start of construction on a centralized production facility on the Cravoviejo block with anticipated start-up in the second quarter of 2011. This facility will initially be capable of handling over 120,000 barrels of total fluids per day and the Corporation expects that this will reduce production costs at Cravoviejo by 20 to 30 percent by mid-2011. Cost savings will come by way of improved water handling, reduced diesel fuel consumption, decreased rental costs and labor efficiencies.The Corporation expects to execute E&P Contracts with the ANH in the next few weeks on the VMM-21 block (119,000 acres) and the Putumayo Block 8 (103,000 acres) which were awarded to the Corporation at the recent (June 22, 2010) bid round in Colombia. Seismic on these blocks will commence this year with plans to begin drilling in 2011.Now with a total of 9 blocks (7 operated) and over 586,000 net acres in Colombia, the Corporation has considerable upside for future production and reserve growth. Moreover, with a strong balance sheet and robust funds flow, the Corporation has sufficient resources to fund its ongoing investment programs.The Corporation, through its subsidiary Grupo C&C Energy (Barbados) Ltd., is engaged in the exploration for, and the acquisition, development and production of, oil resources in Colombia. Its strategy is to develop producing oil assets by appraising and developing existing discoveries and exploring in areas assessed by management to be of low to moderate risk.CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATIONThis press release contains forward-looking information within the meaning of applicable Canadian securities laws that involves known and unknown risks and uncertainties. Forward-looking information typically contains statements with words such as "anticipate", "estimate", "expect", "potential", "could", "will", "plans" or similar words suggesting future outcomes. The Corporation cautions readers and prospective investors in the Corporation's securities to not place undue reliance on forward-looking information as by its nature, it is based on current expectations regarding future events that involve a number of assumptions, inherent risks and uncertainties, which could cause actual results to differ materially from those anticipated by C&C Energia.Forward-looking information in this press release includes, but is not limited to, information concerning the expectations of the Corporation with respect to the completion of definitive contracts with the ANH regarding the VMM-21 block and the Putumayo Block-8, expectations of the Corporation's future production growth, the Corporation's capital program for the remainder of 2010, plans for the construction of production facilities, the Corporation's drilling plans, plans for obtaining seismic data, and expected reductions in operating costs resulting from the Corporation's new central production facility. These forward-looking statements are subject to assumptions regarding the Corporation's operations and the operating environment in Colombia. In particular, the expected timing of the finalization of definitive E&P Contracts for the VMM-21 block and the Putumayo Block-8 is based on assumptions regarding the conduct of negotiating such agreements being similar to those for prior similar agreements. Increases in production and the expected changes in the Corporation's operating costs are based on the assumptions that the Corporation's plans will be completed without any undue difficulty and that other costs will not rise. The Corporation's capital program and drilling and seismic plans are subject to change if circumstances change or if management of the Corporation determines that other business plans are more appropriate.Forward-looking information involves significant known and unknown risks and uncertainties. A number of factors could cause actual results to differ materially from those anticipated by C&C Energia including, but not limited to, general risks associated with the oil and gas industry (e.g. operational risks in exploration; inherent uncertainties in interpreting geological data; changes in plans with respect to exploration or capital expenditures; the uncertainty of estimates and projections in relation to costs and expenses and health, safety and environmental risks), the risk of commodity price and foreign exchange rate fluctuations, the uncertainty associated with the negotiating with the ANH or with other third parties in countries other than Canada and risk associated with international activity. The forward-looking information included in this news release is expressly qualified in its entirety by this cautionary statement. The forward-looking information included herein is made as of the date hereof and C&C Energia assumes no obligation to update or revise any forward-looking information to reflect new events or circumstances, except as required by law.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following Management's Discussion and Analysis ("MD&A") is dated August12, 2010 and should be read in conjunction with the unaudited consolidated financial statements and accompanying notes of C&C Energia Ltd. ("C&C Energia" or the "Corporation") as at and for the three and six months ended June 30, 2010, the Corporation's and C&C Energy (Barbados) Ltd.'s ("C&C Barbados") audited consolidated financial statements and related notes as at December 31, 2009 and the pro forma financial statements of the Corporation appearing in the Corporation's Prospectus dated May 14, 2010 (the "Prospectus") and the selected financial information of C&C Barbados and the summary pro forma financial information appearing under the heading "Selected Financial Information" in the Prospectus, all of which has been prepared in accordance with Canadian GAAP. Additional information for the Corporation can be found on SEDAR at www.sedar.com. All amounts are in United States dollars, unless otherwise stated and all tabular amounts are in thousands of United States dollars, except share amounts or as otherwise noted.Certain information contained in management's discussion and analysis of the Corporation's financial condition and results of the Corporation's operations constitute forward-looking statements. These statements relate to future events or to the Corporation's future financial performance and involve known and unknown risks, uncertainties and other factors that may cause the Corporation's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements are generally identifiable as any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions or future events of performance (often, but not always, through the use of words or phrases such as "will likely result," "expected," "is anticipated," "believes," "estimated," "intends," "plans," "projection" and "outlook"). These statements are not historical facts and may be forward-looking and may involve estimates, assumptions and uncertainties which could cause actual results or outcomes to differ materially from those expressed in such forward-looking statements. Actual results achieved during the forecast period will vary from the information provided herein as a result of numerous known and unknown risks and uncertainties and other factors. Such factors include, but are not limited to: general economic, market and business conditions; fluctuations in oil and gas prices; the results of exploration and development drilling and related activities; fluctuation in foreign currency exchange rates; the uncertainty of reserve estimates; changes in environmental and other regulations; risks associated with oil and gas operations and other factors, many of which are beyond the control of the Corporation. Accordingly, there is no representation by C&C Energia that actual results achieved during the forecast period will be the same in whole or in part as those forecasted. Except to the extent required by law, C&C Energia assumes no obligation to publicly update or revise any forward-looking statements made in this MD&A or otherwise, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements, whether written or oral, attributable to C&C Energia or persons acting on the Corporation's behalf, are qualified in their entirety by these cautionary statements.GAAP and Non-GAAP MeasuresThe Corporation's financial statements have been prepared in accordance with Canadian generally accepted accounting principles, or Canadian GAAP, as applied to its financial statements.This report makes reference to the terms "funds flow from operations", "operating netbacks", "netbacks" and "adjusted working capital", which are not recognized measures under Canadian GAAP and do not have a standardized meaning prescribed by Canadian GAAP. Accordingly, the Corporation's use of these terms may not be comparable to similarly defined measures presented by other companies. Funds flow from operations includes all cash flows from operating activities before changes in non-cash working capital. Operating netback is determined by dividing oil sales less royalties, production expenses and transportation expenses by sales volumes. Management considers operating netback important as it is a measure of profitability per barrel sold and reflects the quality of production. Netbacks are calculated by subtracting royalties, production expenses, transportation expenses, administrative expense, interest and taxes paid by the Corporation from crude oil revenue and dividing by sales volume. Adjusted working capital surplus includes current assets less current liabilities excluding risk management and future taxes and is used to evaluate the Corporation's financial leverage. Management uses these non-GAAP measurements for its own performance measures and to provide its shareholders and potential investors with a measurement of the Corporation's efficiency and its ability to fund a portion of its future growth expenditures.C&C Energia is a public company listed on the Toronto Stock Exchange and trades under the symbol CZE.FINANCIAL REVIEWUnless otherwise noted, all dollar amounts are reported in thousands of U.S. dollars.All comparisons are second quarter 2010 compared to second quarter 2009 unless otherwise noted. Average Daily Crude Oil Three months ended Six months ended Production (1) June 30 June 30 (bbl/day) 2010 2009 2010 2009 ---------------------------------------------------------------------------- Cravoviejo 5,323 3,072 4,754 3,216 Cachicamo 238 - 315 47 ---------------------------------------------------------------------------- Total 5,561 3,072 5,069 3,263 ---------------------------------------------------------------------------- (1) Represents crude oil produced in the period. Actual sales may be different due to crude oil in transit at the period end date. Sales volumes in the second quarter of 2010 were 5,617 bopd (2009 - 2,984 bopd) and in the six months ended June 30, 2010 were 4,526 bopd (2009 - 3,090 bopd) Average oil production increased in 2010, compared to 2009, as a result of the Corporation's continued drilling success on the Cravoviejo and Cachicamo blocks. Oil Revenues Three months ended Six months ended June 30 June 30 2010 2009 2010 2009 ---------------------------------------------------------------------------- ($ thousands) 38,247 14,525 59,976 26,474 ($/bbl) 74.83 53.50 73.21 47.33 Bbl/day 5,617 2,984 4,526 3,090 Total bbl sales 511,107 271,514 819,278 559,306 ---------------------------------------------------------------------------- Oil revenues increased in 2010 versus 2009 due to the higher production levels and higher pricing environment. In addition, effective January 1, 2010, the Corporation began selling its Cravoviejo block oil production to HOCOL, S.A. ("HOCOL"), a subsidiary of Ecopetrol. The sales agreement with HOCOL differs from previous sales agreements in that title transfer occurs when the oil is exported through the Covenas terminal, compared to previous agreements where title transfer occurred when the oil was delivered to the pipeline loading station. As a result, the Corporation will report higher revenue and higher transportation expenses. Revenues during the three and six month periods ended June 30, 2010 increased by $2.2 million and $3.6 million respectively due to the separate presentation of pipeline transportation costs which were netted in the Corporation's 2009 crude oil sales prices. This pipeline transportation component represents an impact of approximately a $4.70 per barrel for the three and six months ended June 30, 2010.The sales agreement with HOCOL also results in more of the Corporation's oil production being sold in the month following the production of the oil compared to previous agreements and from time-to-time, larger fluctuations in oil inventories compared to previous agreements.The Corporation continues to sell its Cachicamo production to third parties net of transportation costs, however the impact on total per barrel metrics is nominal. Risk Management Gains/(Losses) Three months ended Six months ended June 30 June 30 ($ thousands) 2010 2009 2010 2009 ---------------------------------------------------------------------------- Realized gain (loss) (472) 699 (1,033) 2,416 Unrealized gain (loss) 3,417 (8,234) 4,502 (9,985) ---------------------------------------------------------------------------- Gain/(loss) on risk management contracts 2,945 (7,535) 3,469 (7,569) ---------------------------------------------------------------------------- In October 2008, the Corporation purchased puts which established a minimum WTI sales price of $75 per barrel for calendar year 2009 on 600 barrels per day. In April 2009, the Corporation added collars which established a minimum and maximum WTI sales price of $45 to $63 per barrel for the balance of 2009 on 700 barrels per day and $50 to $74 per barrel for calendar year 2010 on 1,300 barrels per day. The Corporation follows mark-to-market accounting for these risk management contracts and records on the balance sheet the market value of the then outstanding puts and collars. In January 2010, the Corporation added collars for 1,000 barrels per day from January to June 2011 with a minimum and maximum WTI sales price of $60 and $115.50 per barrel, respectively. The gain or loss realized by the Corporation during the period is recorded as a realized gain or loss from risk management contracts and the change in market values during the period is recorded as an unrealized gain or loss from risk management contracts.The Corporation realized losses on its collars during the three and six month periods ended June 30, 2010 due to higher oil prices during the period. Gains were realized on the puts and losses on the collars during the three and six month periods ended June 30, 2009, due to lower oil prices in those months. Royalties Three months ended Six months ended June 30 June 30 2010 2009 2010 2009 ---------------------------------------------------------------------------- ($ thousands) 5,193 1,934 8,614 3,620 ($/bbl) 10.16 7.12 10.51 6.47 ---------------------------------------------------------------------------- Royalties as a % of revenue 13.5% 13.3% 14.4% 13.7% ---------------------------------------------------------------------------- The Corporation pays an 8% royalty on oil production at or above 15 degrees API and a 6% royalty on oil production below 15 degrees API to the Government of Colombia on oil production. In addition, the Corporation pays overriding royalties on oil sales from the Cravoviejo block net of certain costs. The gross overriding royalty rate amounts to approximately 8.2%, however, the impact of deducting certain costs reduces the effective royalty rate to between 7.0% and 7.5%.Average oil production and sales increased during the three and six months periods ended June 30, 2010 compared with same periods ended June 30, 2009 and resulting in higher royalty expense from government and overriding royalties. As at the end of the second quarter 2010, the Corporation had approximately 100,000 barrels of oil in inventory for which the royalties due to the ANH have been recorded resulting in the higher royalty rate on a year-to-date basis. This rate will fluctuate with inventory levels. Production expenses Three months ended Six months ended June 30 June 30 2010 2009 2010 2009 ---------------------------------------------------------------------------- ($ thousands) 6,858 4,530 11,196 7,582 ($/bbl) 13.42 16.68 13.67 13.56 ---------------------------------------------------------------------------- Production expenses increased during the three and six month periods ended June 30, 2010 compared to the same periods of 2009 primarily as the result of higher costs for equipment rentals, temporary personal and chemicals due to higher production volumes, plus well work-over costs. Production expenses remained relatively flat on a per barrel basis increasing only 1% during the six months ended June 30, 2010 compared to the same period of 2009. This is due to the Corporation's fixed production costs being spread over increased sales volumes.For the three month period ended June 30, 2009, production costs were higher due to several reasons: a required work-over of a well to clear-up sand accumulation, disposal of oil wastes which had been accumulating since beginning of production, maintenance spare parts purchases, rental equipment was required when pumps were temporarily down for maintenance and road maintenance costs increased due to the rainy season. Reduced volumes resulting from the pipeline restrictions experienced in late May and early June of 2009 also contributed to the higher unit costs for the second quarter of 2009. Transportation expenses Three months ended Six months ended June 30 June 30 2010 2009 2010 2009 ---------------------------------------------------------------------------- ($ thousands) 4,677 1,047 7,193 1,872 ($/bbl) 9.15 3.86 8.78 3.35 ---------------------------------------------------------------------------- Total transportation expenses increased during the three and six month periods ended June 30, 2010 as an additional 176,000 and 214,500 barrels were transported, respectively, compared to the same periods in 2009. In addition, approximately 58,500 and 142,000 additional barrels, respectively, were transported an incremental 430 km during the first and second quarters of 2010, due to capacity on a regional pipeline being temporarily restricted. This increased trucking costs by approximately $8.00 per barrel but this amount was offset by a reduction in the pipeline tariff of approximately $2.00 to $3.00 per barrel.Transportation expenses during the three and six month periods ended June 30, 2010 increased by $2.2 million and $3.6 million respectively due to the separate presentation of pipeline transportation costs which were netted in the Corporation's 2009 crude oil sales prices. This pipeline transportation component represents an impact of approximately a $4.70 per barrel for the three and six month periods ended June 30, 2010. Administrative expenses Three months ended Six months ended June 30 June 30 2010 2009 2010 2009 ---------------------------------------------------------------------------- ($ thousands) 375 461 1,296 839 ($/bbl) 0.73 1.86 1.58 1.79 ---------------------------------------------------------------------------- For the six month period ended June 30, 2010 administrative expenses include higher salaries from the Corporation's management team and other costs related to ongoing public reporting requirements.Expenses were higher during the three month period ended June 30, 2009, due to legal and other costs in relation to analyzing of a potential sale of the Corporation.The lower administrative expenses on a per barrel basis are the result of higher sales volumes. Depletion, depreciation and Three months ended Six months ended accretion expense June 30 June 30 2010 2009 2010 2009 ---------------------------------------------------------------------------- ($ thousands) 9,955 6,089 15,929 12,530 ($/bbl) 19.48 22.43 19.44 22.40 ---------------------------------------------------------------------------- Depletion expense is computed on a unit-of-production basis. The depletion rate was $21.97/barrel for the first three quarters of 2009. As a result of higher proved reserves recorded at December 31, 2009, the current depletion rate was reduced to $19.07/barrel. Depreciation expense is computed on a straight-line basis for administrative assets. Accretion expense is the increase in the present value of the asset retirement obligation for the current period. The total depletion, depreciation and accretion expense decreased on a per barrel basis as result of the lower depletion rate for 2010 and depreciation expense and accretion expense being spread over more barrels. Foreign exchange loss/(gain) Three months ended Six months ended June 30 June 30 2010 2009 2010 2009 ---------------------------------------------------------------------------- ($ thousands) (217) (259) (217) (473) ---------------------------------------------------------------------------- The appreciation of the Colombian peso relative to the U.S. dollar in three and six month periods ended June 30, 2010 resulted in a $0.1 million foreign exchange loss for the second quarter and a $0.1 million foreign exchange loss for the six month period ended June 30, 2010. The Colombian peso to U.S. dollar exchange rate decreased 6 percent from 2,044 at January 1, 2010 to 1,916 at June 30, 2010 and less than 1% from 1,929 at March 30, 2010.Commencing May 25, 2010, the Corporation held cash deposits related to the net proceeds from the IPO in Canadian dollars. The appreciation of the Canadian dollar relative to the U.S. dollar during the period ended June 30, 2010 resulted in a $0.3 million foreign exchange gain for the second quarter. The Canadian dollar to U.S. dollar exchange rate decreased 1% from 1.07 at May 25, 2010 to 1.06 at June 30, 2010. Interest expense Three months ended Six months ended June 30 June 30 2010 2009 2010 2009 ---------------------------------------------------------------------------- ($ thousands) 72 125 142 224 ---------------------------------------------------------------------------- The interest expense for the three and six month periods ended June 30, 2010 relates to commitment fees on the unused portion of the Credit Facility and interest on the outstanding letter of credit. The interest expense for the three and six month periods ended June 30, 2009, relates to $10 million which had been borrowed on the Credit Facility in late January 2009 and repaid in October and December 2009. Stock compensation expense Three months ended Six months ended June 30 June 30 2010 2009 2010 2009 ---------------------------------------------------------------------------- ($ thousands) 2,811 443 3,166 883 ---------------------------------------------------------------------------- The Corporation's 2010 Stock Option Plan was approved on May 25, 2010 and provides for granting to officers, directors, employees and eligible service providers the option to purchase common shares of the Corporation. Stock options vest evenly over three years from the date of the grant and expire after five years from the date of grant.The higher stock based compensation during the three and six month periods ended June 30, 2010, relate to the vesting of the former stock option plans of C&C Barbados and C&C Energy Canada Ltd. totalling $1.9 million and stock based compensation expense for the second quarter of 2010 related to options granted under the 2010 Stock Option Plan for $1.3 million. Income tax expense Three months ended Six months ended June 30 June 30 2010 2009 2010 2009 ---------------------------------------------------------------------------- ($ thousands) 1,055 180 2,037 1,628 ---------------------------------------------------------------------------- The Corporation's pre-tax income is subject to Colombian income tax at a statutory rate of 33% and Barbados income tax at a statutory rate of 1%. The Corporation is also subject to Colombian presumptive and equity taxes, both of which are based on capitalization levels in Colombia.The effective tax rates which are lower than the statutory rates are largely the result of enhanced deductions for the acquisition of certain capital assets.With the increased production levels and earnings, the Corporation has commenced using its tax pools in Colombia and expects to be cash taxable in 2010. SUMMARY OF QUARTERLY RESULTS 2010 2009 ------------------------------------------ Net income (loss) - ($ thousands) 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr ---------------------------------------------------------------------------- Revenue Oil 38,247 21,729 27,193 23,882 Royalties (5,193) (3,421) (3,624) (4,004) Interest 51 12 29 34 Risk management contracts Realized gain (loss) (472) (561) (841) 31 Unrealized gain (loss) 3,417 1,085 (1,657) 564 ------------------------------------------ 36,050 18,844 21,100 20,507 ------------------------------------------ Expenses Production 6,858 4,338 6,602 5,718 Depletion, depreciation and accretion 9,955 5,974 8,491 8,392 Administrative 375 921 913 465 Transportation 4,677 2,516 975 1,283 Foreign exchange loss (gain) (217) - 128 21 Interest 72 70 95 116 Financing - - 31 57 Stock-based compensation 2,811 355 410 421 ------------------------------------------ 24,531 14,174 17,645 16,442 ------------------------------------------ Tax expense (recovery) 1,055 982 1,417 (1,336) ------------------------------------------ Net income (loss) 10,464 3,688 2,038 5,370 ------------------------------------------ Operating netback ($/bbl) (1) ----------------------------- Crude oil sales price 74.83 70.51 71.20 62.77 Royalties 10.16 11.10 9.49 10.52 Production 13.42 14.08 17.29 15.03 Transportation 9.15 8.16 2.55 3.37 ------------------------------------------ Operating net back 42.10 37.17 41.87 33.85 ------------------------------------------ Impact of risk management Contracts ----------------------------- Operating net back 42.10 37.17 41.87 33.85 Risk management contracts (0.92) (1.82) (2.20) 0.08 ------------------------------------------ 41.18 35.35 39.67 33.93 ------------------------------------------ Average crude oil sales (bbl/day) --------------------------------- Cravoviejo 5,334 3,050 3,927 4,119 Cachicamo (2) 283 374 225 16 ------------------------------------------ 5,617 3,424 4,152 4,135 ------------------------------------------ Capital spending ($ thousands) ------------------------------ Drilling and completions 16,737 13,172 2,282 4,313 Facilities and roads 4,416 1,031 2,778 334 Seismic 2,615 1,312 180 12 Property acquisition - - 5,000 - Other 699 575 838 600 ------------------------------------------ 24,467 16,090 11,078 5,259 ------------------------------------------ Funds flow from operations ($ thousands) (3) 20,647 9,204 12,100 11,988 ---------------------------------------------------------------------------- 2009 2008 ------------------------------------------ Net income (loss) - ($ thousands) 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr ---------------------------------------------------------------------------- Revenue Oil 14,525 11,949 17,353 25,445 Royalties (1,934) (1,686) (2,664) (3,482) Interest 18 20 57 35 Risk management contracts Realized gain (loss) 699 1,717 (928) - Unrealized gain (loss) (8,234) (1,751) 5,335 - ------------------------------------------ 5,074 10,249 19,153 21,998 ------------------------------------------ Expenses Production 4,530 3,052 3,240 4,074 Depletion, depreciation and accretion 6,089 6,440 7,252 5,091 Administrative 461 498 1,266 671 Transportation 1,047 825 1,011 506 Foreign exchange loss (gain) (259) (216) 371 (1,775) Interest 125 99 155 2 Financing - - 560 - Stock-based compensation 443 428 431 130 ------------------------------------------ 12,436 11,126 14,686 8,699 ------------------------------------------ Tax expense (recovery) 180 1,418 (101) (1,372) ------------------------------------------ Net income (loss) (7,542) (2,295) 4,968 14,671 ------------------------------------------ Operating netback ($/bbl) (1) ----------------------------- Crude oil sales price 53.50 41.52 51.24 114.83 Royalties 7.12 5.86 7.87 15.71 Production 16.68 10.60 9.57 18.39 Transportation 3.86 2.87 2.99 2.28 ------------------------------------------ Operating net back 25.83 22.19 30.82 78.45 ------------------------------------------ Impact of risk management Contracts ----------------------------- Operating net back 25.83 22.19 30.82 78.45 Risk management contracts 2.57 5.97 3.28 - ------------------------------------------ 28.40 28.16 34.10 78.45 ------------------------------------------ Average crude oil sales (bbl/day) ---------------------------------- Cravoviejo 2,984 3,198 3,681 2,409 Cachicamo (2) - - - ------------------------------------------ 2,984 3,198 3,681 2,409 ------------------------------------------ Capital spending ($ thousands) ------------------------------ Drilling and completions 2,271 5,325 8,427 25,578 Facilities and roads 443 331 3,476 4,649 Seismic - 3 347 (297) Property acquisition - - - - Other 431 516 945 1,092 ------------------------------------------ 3,145 6,175 13,195 31,022 ------------------------------------------ Funds flow from operations ($ thousands) (3) 9,086 6,380 11,524 19,441 ---------------------------------------------------------------------------- Note: (1) See Management Discussion and Analysis - "GAAP and Non-GAAP Measures". (2) Cachicamo crude oil sales for part of the first quarter 2009 were from well tests and credited against capital spending in these periods. Cachicamo commercial crude oil production and sales began in mid-September 2009. (3) Funds flow is a non-GAAP measure defined as cash from operating activities before changes in non-cash working capital on the consolidated statement of cash flow in the consolidated financial statements. See Management Discussion and Analysis - "GAAP and Non-GAAP Measures". Total revenue is impacted by three factors being: oil sales volumes, crude oil sales prices and gains and losses from risk management contracts.Oil sales volumes increased quarter over quarter through 2008 and 2010, except for: (i) the first and second quarters of 2009 when production and sales volumes were impacted in the first quarter by maintenance and water handling issues and in the second quarter of 2009 by pipeline transportation restrictions, and; (ii) The first quarter of 2010 when the new sales agreement with HOCOL became effective resulting in an increase in the amount of the Corporation's production that was sold on a one month lag, resulting in higher oil inventories at the period end versus prior quarters. Oil sales volume increases were the result of beginning 2008 with three producing wells, the successful drilling program in 2008 and the re-completions in 2009 and additional drilling success in 2010.Crude oil prices increased significantly through the first three quarters of 2008, followed by a significant decline in the fourth quarter of 2008 and into the first quarter of 2009 before steadily recovering through the last three quarters of 2009 and into the first half of 2010.In October 2008, the Corporation purchased puts, which established a minimum WTI sales price of $80/barrel for November and December 2008 and $75/barrel for the calendar year 2009 on 600 barrels per day. In April 2009, the Corporation added collars which established a minimum and maximum WTI sales price of $45 to $63/barrel for the balance of 2009 on 700 barrels per day and $50/barrel to $74/barrel for calendar year 2010 on 1,300 barrels per day. The Corporation follows mark-to-market accounting for these risk management contracts. In January, 2010, the Corporation added collars for 30,000 barrels of oil per month from January 1, 2011 to June 30, 2011 with a minimum and maximum WTI sales price of $60 per barrel and $115.50 per barrel, respectively. The gain or loss realized by the Corporation during the quarter is recorded as a realized gain or loss from risk management contracts and the change in market values during the quarter is recorded as an unrealized gain or loss from risk management contracts.Oil prices fell from the date of purchasing the puts in October 2008 to the end of the fourth quarter 2008, resulting in a gain on the puts which was slightly more than offset by the premium paid for the puts, resulting in a realized loss from risk management contracts in the fourth quarter of 2008. The fall in oil prices also resulted in an unrealized gain from risk management contracts in the fourth quarter of 2008, related to the puts outstanding at the end of the quarter.Oil prices continued to fall in the first quarter of 2009 and then steadily recovered through the last three quarters of 2009 and into the first half of 2010. As a result of these movements in oil prices, gains were realized on the puts through the first three quarters of 2009 and losses were realized on collars in the third and fourth quarters of 2009. The unrealized gains on the puts in 2008 were reversed through 2009 and additional unrealized losses on the collars were recorded, resulting in unrealized losses from risk management contacts in three of the four quarters in 2009. The Corporation realized losses on its 2010 collars during the first and second quarters of 2010. These were offset by the reversal of unrealized losses as at December 31, 2009 resulting in unrealized gains during the first and second quarters of 2010.Expenses generally increased quarter over quarter through 2008 and 2010 as a result of the growing oil sales volumes, plus well work-over costs and disposal of oil residuals.LIQUIDITY AND CAPITAL RESOURCESThe Corporation's investment program for the first two quarters of 2010 was funded internally from a combination of its cash position and operating cash flows.On May 25, 2010, the Corporation closed an initial public offering of its common shares and a secondary offering of common shares by C&C Investment Holdings, an affiliate of Denham Commodity Partners Fund IV LP (the "Offerings"). The Offerings consisted of a treasury offering by the Corporation of 7,647,059 common shares and a secondary offering of 4,117,647 common shares, in each case at a price of Cdn$8.50 per common share, for gross proceeds to the Corporation for the treasury offering of approximately US$60.7 million (CDN $ 65 million). Net proceeds related to the treasury offering to the Corporation were US$54.9 million.In September 2008, the Corporation established a secured revolving credit facility for $15 million (the "Credit Facility"). The initial facility is for three years and bears interest at a rate equal to the three-month LIBOR (London Interbank Offer Rate) plus 3.375% per annum on the borrowed amount. The Credit Facility has also an annual fee of 1 percent on the unused portion of the Credit Facility. The Credit Facility is secured by a pledge over the shares of the Corporation's Colombian operating subsidiary. The borrowing base is reviewed at least semi-annually and was subsequently increased to $22 million. Drawings under this Credit Facility are made for a term of less than one year and would be classified as a current liability.In January 2009, the Corporation borrowed $10 million on its Credit Facility. In October 2009, the Corporation repaid $5 million and renewed $5 million drawn on its Credit Facility at an interest rate of 3.7%. In December 2009, the Corporation repaid the $5 million outstanding on the Credit Facility.The Corporation remains debt free and has been advised by its lenders that the borrowing base of the Credit Facility could potentially be increased from its current borrowing base of $22 million to $30 million.The Corporation had a working capital surplus of $62.8 million at June 30, 2010 compared to $12.6 million as at December 31, 2009, including cash amounting to $74.3 million (December 31, 2009 - $14.2 million). The increase in working capital is due to net cash proceeds of approximately $54.9 million from the initial public offering offset by the Corporation's ongoing investments in Colombia.All accounts receivables have been assessed for credit risk and no allowance for doubtful accounts is necessary at this time.Accounts payable and accrued liabilities have increased since December 31, 2009 due to the timing of activity levels in Colombia.C&C Energia's assets provide significant funds flow from operations and are the Corporation's largest source of liquidity. The Corporation has a history of generating funds flow from operations and has sufficient funds to meet its contractual obligations, commitments and current investment plans.C&C Energia is listed on the Toronto Stock Exchange under the stock symbol CZE.Contractual Obligations and ContingenciesThe following is a summary of all current contractual obligations:The Corporation's current exploration commitments are as follows:There are currently no outstanding work commitments on the Cravoviejo, Cachicamo or Morpho blocks.On the Llanos 19 Block, the work commitment is for exploration expenditures of $4.0 million by March 2011.The commitment on the Pajaro Pinto block amounts to $1.3 million and includes the drilling of an exploration well by September 2011.The Coati Block is currently suspended pending receiving the environmental permit. The Coati-1 well must be drilled within four months of receiving the environmental permit, which the Corporation anticipates receiving by the end of 2010. The Coati-1 well is estimated to cost $9 million, well in excess of the $3.5 million under the work commitment.On August 5, 2010 the Corporation converted the Andaquies block from a technical evaluation agreement to an E&P contract with the signing of a definitive agreement with the ANH. The Corporation has committed, within three years of being awarded the E&P Contract, to acquire 80 km of 2D seismic plus drill one exploratory well or acquire 100 km2 of 3D seismic for a total estimated cost of $5 million.The Corporation entered into a pipeline transportation ship-or-pay contract to transport oil on the OCENSA Pipeline from the Cusiana station to the Covenas port terminal. Pursuant to the terms of this contract, the Corporation is committed to transporting 2,500 barrels per day for five years at a cost of $5.00/barrel. The Corporation also has the option, subject to available capacity, to transport up to an additional 1,000 barrels per day for five years at the same $5.00/barrel cost.The Ocensa contract initially contemplated a May 1, 2010 completion date for the building of the Cusiana loading facility. However, as at the date of this report, construction of the loading facility had not commenced and the Corporation had received notification suspending the contract. The Corporation is engaged in ongoing discussions with OCENSA to determine whether or not construction will proceed. C&C Energia is investigating alternative arrangements, which, in the event the contract is cancelled, could result in the commitments associated with this contract being terminated.Transactions with Related PartiesOffice rent for the six month period ended June 30, 2010 of $14,982 (June 30, 2009 - $13,476) was paid to a Corporation of which a director of C&C Energia is a director.Off Balance Sheet TransactionsThe Corporation has not entered into any off-balance sheet transactions.Outstanding Share DataThe aggregate number of C&C Energia common shares, stock options and warrants outstanding at August 12, 2010 was 59,011,505 (common shares - 54,297,503; options - 3,915,068; warrants - 798,934).RISKS AND UNCERTAINTIESC&C Energia is exposed to a variety of risks, including but not limited to competitive, operational, political, environmental, and financial risks. There have been no significant changes in the three and six month periods ended June 30, 2010 to the risks and uncertainties identified in the MD&A for the year ended December 31, 2009 contained in the Corporation's Prospectus and elsewhere in that Prospectus.SensitivitiesThe Corporation's net income and funds flow from operations are sensitive to changes in the price of crude oil, exchange rates and interest rates.The following factors demonstrate the expected annualized impact on net income and cash flow from operations:At June 30, 2010, had the forward WTI crude oil price increased or decreased by $1.00, the unrealized loss or gain on the foreign exchange contracts would change net income by approximately $0.1 million for the period.As at June 30, 2010, had the U.S. dollar appreciated or depreciated by five percent against the Colombian peso, with all other variables held constant, net income for the period would have approximately increased $0.2 million or decreased $0.2 million. As at June 30, 2010, had the U.S. dollar appreciated or depreciated by one cent against the Canadian dollar, net income for the period would have approximately decreased $0.5 million or increased $0.5 million.The Corporation's sensitivity to interest rates is currently immaterial.CRITICAL ACCOUNTING POLICIES AND ESTIMATESThe Corporation's financial statements are prepared in accordance with Canadian GAAP, which require management to make judgments, estimates and assumptions which may have a significant impact on the financial statements of C&C Energia. A summary of the Corporation's significant accounting policies can be found in Note 1 to the audited consolidated financial statements of C&C Barbados. The following is a discussion of those accounting policies and estimates that are considered critical in the determination of the Corporation's financial results.Capital Assets - Full Cost AccountingThe Corporation follows the full cost method of accounting as described in Note 1 to the audited consolidated financial statements of C&C Barbados. Alternatively, the Corporation could follow the successful efforts method of accounting whereby all costs related to non-productive wells are expensed in the period in which they are incurred.Under the full cost method of accounting, capitalized costs are subject to a country-by-country cost centre impairment test. Under the successful efforts method of accounting, the costs are aggregated on a property by property basis and the carrying value of each property is subject to an impairment test. These policies may result in a different carrying value for capital assets and a different net income. The Corporation has elected to follow the full cost method, which is the method most commonly followed.Under full cost accounting, a limit is placed on the carrying value of the net capitalized costs in each cost centre in order to test impairment. Impairment exists when the carrying value of developed properties of a cost centre exceeds the estimated undiscounted future net cash flows associated with the cost centre's proved reserves. Costs relating to undeveloped properties are subject to individual impairment assessments until it can be determined whether or not proved reserves exist. If impairment is determined to exist, the costs carried on the balance sheet in excess of the discounted future net cash flows associated with the cost centre's proved plus probable reserves are charged to income.Reserve EstimatesReserve estimates can have a significant impact on net income and the carrying value of capital assets. The process of estimating reserves requires significant judgment based on available geological, geophysical, engineering, and economic data, projected rates of production, estimated commodity price forecasts and the timing of future expenditures, all of which are subject to interpretation and uncertainty. Reserve estimates impact net income through depletion expense and the application of impairment tests. Revisions or changes in reserve estimates can have either a positive or a negative impact on net income and can impact the carrying amount of capital assets.Potential lenders may also use reserve estimates to assess the allowable borrowing base under a secured credit facility. Changes to the reserve estimates can result in borrowing base increases or decreases, which could impact the Corporation's financial position.Asset Retirement ObligationsThe Corporation recognizes the estimated fair value of future retirement obligations associated with capital assets as a liability. The Corporation estimates the liability based on the estimated costs to abandon and reclaim its net ownership in tangible long lived assets such as wells and the estimated timing of the costs to be incurred in future periods. Actual payments to settle the obligations may differ from estimated amounts.Stock Based CompensationThe Corporation accounts for stock-based compensation using the fair-value method of accounting for stock options based on expected volatility and option life estimates. Actual stock-based compensation may differ from estimated amounts.Future Income TaxesThe Corporation recognizes a future income tax liability based on estimates of temporary differences between the book and tax value of its assets. An estimate is also used for both the timing and tax rate upon reversal of the temporary differences. Actual differences and the timing of reversals may differ from estimates, impacting the future income tax balance and net income.RECENT ACCOUNTING PRONOUNCEMENTSThe Corporation has assessed new and revised accounting pronouncements that have been issued that are not yet effective:In February 2008, the Canadian Accounting Standards Board ("AcSB") confirmed that effective January 1, 2011, Canadian GAAP for publicly accountable entities will be replaced in full with International Financial Reporting Standards ("IFRS") as promulgated by the International AcSB. Management is assessing the impact of adopting IFRS and has developed a plan to achieve convergence to IFRS by January 1, 2011. The Corporation has identified that the accounting and disclosure of capital assets, which includes the exploration and evaluation of oil properties, accounting for property, plant and equipment as well as asset impairment testing are the areas that will have the greatest potential impact upon conversion. At this time the impact of these changes cannot be reasonably determined or estimated. The Corporation will continue to monitor changes in the adoption of IFRS, as well as continue to assess the impact of these new standards on its financial statements.In January 2009, the AcSB issued Section 1582, Business Combinations, which replaces 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 2011 with earlier application permitted. Once adopted, this standard will impact the accounting treatment of future business combinations.In January 2009, the AcSB issued Sections 1601, Consolidated Financial Statements, and 1602, Non-controlling Interests, which replaces existing guidance. 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 2011 with earlier application permitted. Management does not expect the adoption of this section to have a material impact on the results of operations or financial position.International Financial Reporting StandardsIn February 2008, the AcSB confirmed the convergence of Canadian GAAP with FRS will be required for interim and annual financial statements effective for fiscal years beginning on or after January 1, 2011, including comparatives for 2010 and an opening balance sheet at January 1, 2010 showing the changes from Canadian GAAP to IFRS.IFRS uses a conceptual framework similar to Canadian GAAP, but prescribes certain differences for recognition, measurement and disclosure principles which are outlined below under "Potential Impacts of IFRS Adoption".C&C Energia commenced its IFRS conversion project in early 2009 and has completed an initial scoping phase, and established a project plan and project team, which includes key finance staff, management, external advisors and audit committee.IFRS Conversion Project PlanThe IFRS conversion project plan consists of three phases as identified below: ---------------------------------------------------------------------------- IFRS Conversion Project Phase Status ---------------------------------------------------------------------------- Phase 1 Initial Scoping Completed. Identification of key differences between Canadian GAAP and IFRS, and high-level changes required in accounting policies, systems and processes. ---------------------------------------------------------------------------- Phase 2 Detailed Assessment and In progress. Design Comprehensive documentation and Completed a preliminary review of analysis of changes in accounting certain high impact Standards and standards, policies, processes potential impact on the Corporation's and procedures, which expands on accounting policies and reporting scoping from Phase 1. processes. ---------------------------------------------------------------------------- Phase 3 - Implementation In progress. To be completed by Q4 2010. Implementation and execution of changes identified and prioritized from Phase 2. ---------------------------------------------------------------------------- Potential Impacts of IFRS AdoptionSignificant differences that have been identified between Canadian GAAP and IFRS that will impact C&C Energia are:- accounting for capital assets, including exploration and evaluation costs, depletion and depreciation, impairment testing,- asset retirement obligations,- share-based payments, and- an increased level of disclosure requirements.These differences have been identified based on the current IFRS standards issued and expected to be in effect on the date of transition. Certain IFRS standards may be modified, and as a result, the impact may be different than the Corporation's current expectations. The project team is currently determining the financial statement impact of these standards. The impact on the consolidated financial statements is not reasonably determinable at this time.First Time Adoption of IFRS ("IFRS 1")The transition to IFRS requires the Corporation to apply IFRS 1, which prescribes requirements for preparing IFRS-compliant financial statements in the first reporting period after the changeover date (January 1, 2010). IFRS 1 includes a requirement for retrospective application of each IFRS as if they were always in effect. IFRS 1 also mandates certain exemptions for retrospective application and provides optional exemptions from retrospective application to ease the transition to IFRS in the transition year.In July 2009, the International Accounting Standards Board approved amendments and released "Additional Exemptions for First-time Adopters", which prescribes transitional exemptions for oil and gas companies following full cost accounting. The amendment allows an entity that used full cost accounting under Canadian GAAP to elect, at its time of adoption, to measure exploration and evaluation assets at the amount determined under Canadian GAAP and to measure oil and natural gas assets in the development or production phases by allocating the amount determined under Canadian GAAP for those assets, to the underlying assets pro rata using reserve volumes or reserve values as of the date of transition, subject to an impairment test as prescribed under IFRS. This exemption will allow C&C Energia to apply IFRS to its full cost pools on a prospective basis, from date of transition to IFRS.Impairment of Assets ("IAS 36")IAS 36 uses the concept of cash generating units to accumulate asset carrying costs to test and measure impairment. Under IFRS, the Corporation will no longer test for asset impairment at the cost center level (country level) as permitted under the Canadian GAAP full cost guideline. IFRS will require impairment testing to be performed at the cash generating unit level, which is lower than the current cost center level.In addition, IAS 36 uses a one-step approach for testing and measuring asset impairments, with asset carrying values being compared to the higher of: value-in-use and fair value less costs to sell. Value-in-use is defined as the amount equal to the present value of future cash flows expected to be derived from the asset. In the absence of an active market, fair value less costs to sell may also be determined using discounted cash flows. The use of discounted cash flows under IFRS to test and measure asset impairment differs from Canadian GAAP, which uses undiscounted cash flows as an initial first step to test impairment.Under, under IAS 36, impairment losses that were previously recognized may be reversed where circumstances change such that the impairment is reduced. This differs from Canadian GAAP, which prohibits the reversal of previously recognized impairment losses.Exploration and Evaluation Expenditures ("IFRS 6")Oil and gas companies are required to account for exploration and evaluation expenditures in accordance with IFRS 6. This standard addresses the recognition, measurement, presentation and disclosure requirements for costs incurred in the exploration phase. Unlike Canadian GAAP, IFRS requires the identification and presentation of exploration and evaluation expenditures to be separated from developed and producing assets. In addition, C&C Energia will be required to perform an impairment test on exploration and evaluation expenditures when there is a determination that the expenditures have resulted in a technically feasible and commercially viable project. At that time, the expenditures would be tested for impairment, and then transferred to the developed and producing assets category. The Corporation is currently evaluating its policy options and applicable impact of these policies under IFRS.Property Plant and Equipment ("IAS 16")IFRS and Canadian GAAP contain the same basic principles of accounting for property, plant and equipment; however, differences in application do exist, specifically for oil and gas companies. IAS 16 requires costs recognized as property plant and equipment to be allocated to the significant parts of the asset and to amortize each significant component separately. This is a departure from Canadian GAAP for full cost oil and gas companies, and may increase the number of components to amortize separately, and could impact the amount of amortization expense.Under IAS 16, companies have the choice to account for property, plant and equipment under the cost model, or the revaluation model. It is expected that C&C Energia will choose and apply the cost model to account for its property, plant and equipment after transition to IFRS.Borrowing Costs ("IAS 23")IFRS requires the capitalization of borrowing costs that are associated with the construction and development of certain assets. Under Canadian GAAP, C&C Energia expenses all borrowing costs. Analysis of this standard is currently underway to determine a methodology and quantify the amount of borrowing costs that if any, will be capitalized under IFRS. Under IFRS certain borrowing costs may be capitalized to the balance sheet and not expensed as currently reported by the Corporation.Decommissioning Costs ("IAS 37")Under IFRS, the recognition criteria for contingent liabilities are much more explicit than Canadian GAAP and may potentially require the booking of additional liabilities associated with the asset retirement obligations of C&C Energia's oil and gas assets. Liabilities for decommissioning and restoration are recognized for both legal and constructive obligations. Under IFRS, the estimated liability is calculated at each reporting period using estimates of risk-adjusted future cash outflows, discounted using the risk free rate whereas under Canadian GAAP the estimated liability is estimated using a credit-adjusted rate, rather than a risk free rate.Changes in the estimated timing of cash flows necessary to discharge the obligation are added to or deducted from the cost of the related asset and the adjusted amounts are amortized prospectively over the estimated useful life of the asset. The measurement of the present value of the estimate (arising due to different discount rates used) is likely to be higher under IFRS as compared to Canadian GAAP. However the difference is not known at this time.In addition, the unwinding of the discount arising from the passage of time is recognized as a financing cost and not a part of depletion expense as is currently presented in C&C Energia's financial statements under Canadian GAAP.Internal Controls over Financial Reporting and DisclosureAs part of C&C Energia's certification of internal controls process, as required under Canadian Securities Administrators' National Instrument 52-109, all entity level, information technology, disclosure and business process controls will be reviewed, updated as necessary and tested to reflect changes arising from C&C Energia's conversion to IFRS. Material changes identified will be mapped and tested to ensure that no material deficiencies exist as a result of the conversion to IFRS.Information SystemsIt is expected that the conversion to IFRS will have a minimal impact on the information system requirements. C&C Energia has initiated a plan to map IFRS accounting and reporting requirements to changes required in the accounting system which will be implemented and tested during 2010.DISCLOSURE CONTROLS AND PROCEDURES OVER FINANCIAL REPORTINGThe Corporation is in the process of evaluating the effectiveness and design of its disclosure controls and procedures. This process is expected to be completed by the year-end and will enable the Corporation to provide certification of C&C Energia annual filings in compliance with National Instrument 52-109 "Certification of Disclosure in Issuer's Annual and Interim Filings". C&C ENERGIA LTD. CONSOLIDATED BALANCE SHEETS (unaudited) (Thousands of United States dollars) June 30, December 31, As at 2010 2009 ---------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents $ 74,255 $ 14,231 Accounts receivable 17,743 12,746 Inventories 3,939 - Prepaids and deposits 525 561 Future income tax assets 693 220 ---------------------------------------------------------------------------- 97,155 27,758 Capital assets 157,503 133,873 Risk management contracts (Note 6) 316 - Future income tax assets - 388 ---------------------------------------------------------------------------- Total assets $ 254,974 $ 162,019 ---------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities Accounts payable and accrued liabilities $ 33,676 $ 14,824 Capital lease obligation 27 90 Risk management contracts (Note 6) 1,550 5,736 ---------------------------------------------------------------------------- 35,253 20,650 Asset retirement obligations 4,556 3,731 Future income tax liability 1,382 2 ---------------------------------------------------------------------------- 41,191 24,383 Shareholders' equity Common shares and warrants (Note 2) 172,599 108,809 Contributed surplus (Note 2) 1,278 3,073 Retained earnings 39,906 25,754 ---------------------------------------------------------------------------- 213,783 137,636 ---------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 254,974 $ 162,019 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Commitments and contingencies (Note 10) Subsequent events (Note 11) See accompanying notes to these consolidated financial statements. C&C ENERGIA LTD. CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (unaudited) (Thousands of United States dollars) Three Months Ended Six Months Ended ----------------------------------------- June 30, June 30, 2010 2009 2010 2009 ---------------------------------------------------------------------------- Revenues Oil $ 38,247 $ 14,525 $ 59,976 $ 26,474 Royalties (5,193) (1,934) (8,614) (3,620) Gain (loss) on risk management contracts (Note 6) 2,945 (7,535) 3,469 (7,569) Interest income 51 19 63 42 ---------------------------------------------------------------------------- 36,050 5,075 54,894 15,327 ---------------------------------------------------------------------------- Expenses Production 6,858 4,530 11,196 7,582 Transportation 4,677 1,047 7,193 1,872 Depletion, depreciation and accretion 9,955 6,089 15,929 12,530 Administrative 375 461 1,296 839 Foreign exchange (gain) loss (217) (259) (217) (473) Interest 72 125 142 224 Stock-based compensation (Note 2) 2,811 443 3,166 883 ---------------------------------------------------------------------------- 24,531 12,436 38,705 23,457 ---------------------------------------------------------------------------- Income (loss) before taxes 11,519 (7,361) 16,189 (8,130) Income tax expense 1,055 180 2,037 1,628 ---------------------------------------------------------------------------- Net income (loss) 10,464 (7,541) 14,152 (9,758) Retained earnings, beginning of period 29,442 33,343 25,754 35,560 ---------------------------------------------------------------------------- Retained earnings, end of period $ 39,906 $ 25,802 $ 39,906 $ 25,802 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Basic earnings (loss) per share (Note 5) $0.22 ($0.17) $0.31 ($0.23) Diluted earnings (loss) per share (Note 5) $0.22 ($0.17) $0.31 ($0.23) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes to these consolidated financial statements. C&C ENERGIA LTD. CONSOLIDATED STATEMENTS OF CASH FLOW (unaudited) (Thousands of United States dollars) Three Months Ended Six Months Ended June 30, June 30, ----------------------------------------- 2010 2009 2010 2009 ---------------------------------------------------------------------------- Operating Activities Net income (loss) $ 10,464 $ (7,541) $ 14,152 $ (9,758) Future tax expense (recovery) 1,067 (80) 1,295 1,110 Depletion, depreciation and accretion 9,955 6,089 15,929 12,530 Unrealized foreign exchange (gain) loss (232) (665) (188) 10 Stock-based compensation 2,811 443 3,166 883 Unrealized loss (gain) on risk management contracts (Note 6) (3,417) 8,234 (4,502) 9,985 ---------------------------------------------------------------------------- 20,648 6,480 29,852 14,760 Changes in non-cash working capital (Note 7) (6,706) (4,113) (1,008) (11,925) ---------------------------------------------------------------------------- 13,942 2,367 28,844 2,835 ---------------------------------------------------------------------------- Financing Activities Issuance of common shares - net of underwriters' commission 57,104 - 57,104 - Share issuance costs 1,725 - 1,725 - Deferred share issuance costs 696 - - - Proceeds from bank debt - - 2,000 10,000 Repayment of bank debt - - (2,000) - Changes in non-cash working capital (Note 7) (595) (2) 10 55 ---------------------------------------------------------------------------- 58,930 (2) 58,839 10,055 ---------------------------------------------------------------------------- Investing Activities Expenditures on capital assets (24,467) (3,144) (40,557) (9,320) Changes in non-cash working capital (Note 7) 9,760 (1,766) 12,608 (2,995) ---------------------------------------------------------------------------- (14,707) (4,910) (27,949) (12,315) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Impact of foreign exchange rate changes on cash and cash equivalents 290 678 290 320 ---------------------------------------------------------------------------- Net change in cash and cash equivalents 58,455 (1,867) 60,024 895 Cash and cash equivalents, beginning of period 15,800 10,257 14,231 7,495 ---------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 74,255 $ 8,390 $ 74,255 $ 8,390 ---------------------------------------------------------------------------- Cash and cash equivalents consist of: ---------------------------------------------------------------------------- Cash $ 70,339 $ 4,659 $ 70,339 $ 4,659 Cash equivalents $ 3,916 $ 3,731 $ 3,916 $ 3,731 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Other cash flow information: ---------------------------------------------------------------------------- Cash taxes paid $ 144 $ 89 $ 144 $ 176 Cash interest paid $ 57 $ 127 $ 127 $ 169 Cash interest received $ 51 $ 19 $ 63 $ 42 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes to these consolidated financial statements. C&C ENERGIA LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (UNAUDITED, ALL TABULAR AMOUNTS ARE EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT AS OTHERWISE NOTED)NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATIONC&C Energia Ltd. ("C&C Energia" or the "Corporation"), formerly C&C Energy Canada Ltd. ("C&C Canada") was a private company, incorporated under the ABCA on February 28, 2005 for the purpose of investing in oil and gas assets in Colombia through its subsidiaries, C&C Energy (Barbados) Ltd. ("C&C Barbados") and Grupo C&C Energia (Barbados) Ltd. ("C&C Grupo") .Under the terms of an Agreement and Plan of Reorganization ("Reorganization") dated May 14, 2010, among C&C Canada and the other shareholders of C&C Barbados, the Corporation acquired all of the shares of C&C Barbados, which holds 100% of the outstanding common shares of C&C Grupo.As all of the entities (C&C Energia, C&C Barbados, and C&C Grupo) were under common control, and there has been no change in control as a result of the Reorganization, the interim consolidated financial statements have been prepared to represent the activities of all of the above entities from the date that each of them commenced operations.The unaudited interim consolidated financial statements for C&C Energia as at and for the three and six months ended June 30, 2010 should be read in conjunction with the C&C Canada's and C&C Barbados audited consolidated financial statements and related notes as at and for the year ended December 31, 2009, all of which has been prepared in accordance with Canadian GAAP. The notes to these interim consolidated financial statements do not conform in all respects to the note disclosure requirements of generally accepted accounting policies ("GAAP") for annual financial statements. These interim consolidated financial statements are prepared using the same accounting policies and methods of computation as disclosed in the consolidated financial statements as at and for the year ended December 31, 2009, except for the following:InventoryInventories consists of crude oil in transit or in storage tanks at the balance sheet date and are valued at the lower of cost, using the weighted average cost method, or net realizable value. Costs include direct and indirect expenditures incurred in bringing the crude oil to its existing condition and location.NOTE 2 - SHARE CAPITALAuthorizedThe authorized capital is comprised of an unlimited amount of common shares and preferred shares. Common Shares Common Share Continuity Number Amount ---------------------------------------------------------------------------- Balance at December 31, 2009 40,931,162 $ 50,559 Impact of 2 for 1 share consolidation (20,465,581) - Issued pursuant to C&C Energy (Barbados) Ltd. share exchange agreement (1) 22,684,448 58,250 ---------------------------------------------------------------------------- Balance at December 31, 2009 - restated for reorganization 43,150,029 $ 108,809 ---------------------------------------------------------------------------- Issued pursuant to option and warrant exercise 897,441 919 Issued pursuant to C&C Energy (Barbados) Ltd. option surrender and share exchange agreements (1) 583,231 4,042 Issued pursuant to stock split 421,875 - Issued pursuant to private placement and share exchange agreements (1) 1,597,868 3,946 Issued pursuant to IPO 7,647,059 60,749 Share issue costs - (5,866) ---------------------------------------------------------------------------- Balance at June 30, 2010 54,297,503 $ 172,599 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Pursuant to the Reorganization, all of the outstanding equity in C&C Energy (Barbados) Ltd. was exchanged for common shares of the Corporation, which aggregates to $66.2 million. See Note 9. On May 25, 2010, the Corporation closed an initial public offering of its common shares consisting of 7,647,059 common shares at a price of Cdn$8.50 per common share for gross proceeds of approximately Cdn$65 million. Included in the June 30, 2010 common shares and warrants balance of $172.6 million is an amount of $2.6 million related to warrants issued on April 27, 2010. See Warrants section below.Immediately prior to the public offering of common shares described above and under the terms of an Agreement and Plan of Reorganization dated May 14, 2010, among C&C Canada (renamed to C&C Energia Ltd., the "Corporation") and the other shareholders of C&C Energy (Barbados) Ltd., the Corporation acquired all of the not-owned shares of C&C Energy (Barbados) Ltd. in exchange for the issuance of 24,282,316 new common shares. The Corporation also entered into agreements with C&C Energy (Barbados) Ltd. and each of the option-holders of C&C Energy (Barbados) Ltd. who are not parties to the Reorganization, pursuant to which the option-holders exchanged their options for an aggregate of 293,639 newly issued shares of C&C Barbados and subsequently the Corporation acquired such shares in exchange for the issuance of an aggregate of 583,231 new common shares. Contributed Surplus Contributed Surplus Continuity Amount ---------------------------------------------------------------------------- Balance at December 31, 2009 $ 3,073 Stock-based compensation - former stock option plans 1,888 Transfer to common shares related to exercised stock options (4,961) Stock-based compensation - 2010 Stock Option Plan 1,278 ---------------------------------------------------------------------------- Balance at June 30, 2010 $ 1,278 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Stock OptionsThe Corporation's 2010 Stock Option Plan was approved on May 25th 2010 and provides for granting to officers, directors, employees and eligible service providers the option to purchase common shares of the Corporation. Stock options vest evenly over three years from the date of the grant and expire after five years from the date of grant. This Stock Option Plan also provided for replacement options issued on April 1st 2010 in substitution for stock options granted to executive officers under the former stock option plan which expire after seven years. All former stock option plans have been terminated. Weighted Avg. Exercise Price Stock Option Continuity Stock Options Cdn$ ---------------------------------------------------------------------------- Granted - replacement options 1,822,568 8.85 Granted 2,202,500 8.50 Forfeited (110,000) 8.50 ---------------------------------------------------------------------------- Balance at June 30, 2010 3,915,068 8.66 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The following summarizes information about stock options outstanding at June 30, 2010: Stock Options Outstanding Stock Options Exercisable ---------------------------------------------------------------------------- Weighted Average Exercise Price Remaining Life Exercise Price (Cdn$) Number (Years) Number (Cdn$) ---------------------------------------------------------------------------- 8.50 2,092,500 4.9 - - 8.80 1,597,868 6.8 - - 9.23 224,700 6.8 - - ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Stock-Based CompensationThe fair value of the stock options granted has been estimated on their respective grant dates using the Black-Scholes option-pricing model using the following assumptions: ---------------------------------------------------------------------------- Risk-free interest rate 2.5% - 3.1% Dividend rate 0% Expected life 5.9 years Volatility 76% - 94.5% Forfeiture rate 5% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The weighted average fair value per stock option granted during the period ended June 30, 2010 was Cdn$6.05 as at the date of the grant.WarrantsWarrants issued on April 27, 2010, as part of the Reorganization and expiring after three years from date of issuance, entitle the holder thereof to purchase one Common Share at an exercise price of Cdn$6.04 per share. Warrant Continuity Number Amount ---------------------------------------------------------------------------- Balance at December 31, 2009 - $ - ---------------------------------------------------------------------------- Issued pursuant to private placement 798,934 2,606 ---------------------------------------------------------------------------- Balance at June 30, 2010 798,934 $ 2,606 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The fair value of each Warrant has been estimated on their respective issuance dates using the Black-Scholes option-pricing model using the following assumptions: ---------------------------------------------------------------------------- Risk-free interest rate 2.4% Dividend rate 0% Expected life 3 years Volatility 88.9% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The weighted average fair value of all warrants issued during the period ended June 30, 2010 was Cdn$3.47 per warrant. For the period ended June 30, 2010, no warrants were exercised.NOTE 3 - BANK DEBTAs at June 30, 2010 the Corporation had a secured revolving credit facility for $22 million. The facility is for three years effective September 2008. Letters of credit issued against this credit facility reduce the amounts available under the facility. At June 30, 2010 and under this credit facility, the Corporation had drawn $nil (December 2009 - $nil) and had letters of credit to guarantee work commitments for $2 million at a 3.125% annual interest rate.NOTE 4 - CAPITAL MANAGEMENTThe Corporation's policy is to fund exploration and development capital with equity, debt and operating cash flow. The Corporation considers its capital structure to include common shares and working capital deficiency (a non-GAAP measure the Corporation defines as outstanding bank debt plus current liabilities less current assets).The Corporation is in compliance with the financial covenants contained in its credit facility agreement. The financial covenants, which are non-GAAP measures, are: to maintain a ratio under 3.0 of indebtedness to trailing twelve month earnings before interest, tax, depletion, depreciation and amortization (EBITDA) adjusted by the non-cash effect of risk management contracts; to maintain a current ratio greater than 1.0 (current assets plus unused bank debt divided by current liabilities excluding current non-cash risk management contracts balances); and to maintain at all times a minimum of $5 million in the aggregate in cash on hand and unused bank debt.The Corporation has not paid or declared dividends since the date of incorporation, nor are any contemplated in the foreseeable future.The Corporation's working capital, calculated as current liabilities less current assets, and common shares and warrants capital is summarized in the following table: June 30, December 31, As at 2010 2009 ---------------------------------------------------------------------------- Bank debt $ - $ - Current liabilities 35,253 20,650 Less: current assets (97,155) (27,758) ---------------------------------------------------------------------------- Working capital deficiency (surplus) $ (61,902) $ (7,108) ---------------------------------------------------------------------------- Common shares and warrants capital $ 172,599 $ 108,809 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- NOTE 5 - PER SHARE NUMBERS The following table summarizes the common shares used in calculating earnings (loss) per share: Three months ended Six months ended June 30, June 30, ---------------------------------------- 2010 2009 2010 2009 ------------------------------------------------------------------------- Weighted average common shares outstanding - Basic 47,560,019 43,150,029 45,367,206 43,150,029 Dilutive effect of stock options and stock purchase warrants 114,279 - 57,455 - ------------------------------------------------------------------------- Weighted average common shares outstanding - Diluted 47,674,298 43,150,029 45,424,661 43,150,029 -------------------------------------------------------------------------- -------------------------------------------------------------------------- NOTE 6 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENTThe Corporation's financial assets and liabilities are comprised of cash and cash equivalents, risk management contracts, accounts receivable, deposits, accounts payable and accrued liabilities and bank debt. Risk management assets and liabilities arise from the use of derivative financial instruments. There have been no changes to the hierarchy classification during the three and six months ended June 30, 2010.Fair values of financial assets and liabilities, summarized information related to risk management positions, and discussion of risks associated with financial assets and liabilities are presented as follows:Fair Value of Financial InstrumentsThe fair values of cash and cash equivalents, accounts receivable, deposits, accounts payable and accrued liabilities and bank debt approximate their carrying amount due to the short-term maturity of those instruments.Risk management contracts are recorded at their estimated fair value based on the mark-to-market method of accounting, using quoted market prices or, in their absence, third-party market indications and forecasts.When drawn, bank debt bears interest at a floating rate and accordingly the fair value approximates the carrying value.The carrying value and fair value of these financial instruments at June 30, 2010 is disclosed below by financial instrument category: Financial Instrument Carrying Value Fair Value ($) ($) ---------------------------------------------------------------------------- Assets Held for Trading Cash and cash equivalents 74,255 74,255 Risk management contracts 316 316 Loans and Receivables Accounts receivable 17,743 17,743 Deposits 480 480 Liabilities Held for Trading Risk management contracts 1,550 1,550 Other Liabilities Accounts payable and accrued liabilities 33,676 33,676 Bank debt - - ---------------------------------------------------------------------------- Risk Management Contracts The net income impact of realized and unrealized gains (losses) from risk management contracts, before income tax, is as follows: Three months ended Six months ended June 30, June 30, ---------------------------------------- 2010 2009 2010 2009 ---------------------------------------------------------------------------- Realized gains (losses) $ (472) $ 699 $ (1,033) $ 2,416 Unrealized gains (losses) 3,417 (8,234) 4,502 (9,985) ---------------------------------------------------------------------------- Gain (loss) on risk management contracts $ 2,945 $ (7,535) $ 3,469 $ (7,569) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Risks Associated with Financial Assets and LiabilitiesThe Corporation has exposure to the following risks related to its financial instruments: commodity price, credit risk, liquidity risk and foreign currency risk. This note presents information about the Corporation's exposure to these risks, and the Corporation's objectives, policies and processes for measuring and managing these risks.Commodity Price RiskCommodity price risk is the risk that future cash flows will fluctuate as a result of changes in commodity prices. Significant changes in commodity prices can also impact the Corporation's borrowing base under its secured credit facility. Commodity prices for crude oil are impacted by world economic events that dictate the levels of supply and demand. From time to time the Corporation may attempt to mitigate commodity price risk through the use of financial derivatives. The Corporation had the following risk management contracts outstanding at June 30, 2010: Term Volume Price Benchmark ---------------------------------------------------------------------------- Jul 1, 2010 - Dec 31, 2010 1,300 Bopd $50 floor/$74 ceiling WTI Jan 1, 2011 - Jun 30 2011 1,000 Bopd $60 floor/$115 ceiling WTI ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- At June 30, 2010 had the forward WTI crude oil price increased or decreased by $1.00, the unrealized loss or gain on these contracts would change by approximately $0.1 million and would be reflected in net income.Credit RiskCredit risk is the risk that cash and cash equivalents, risk management contracts, accounts receivable and deposits may not be collectible.Cash and cash equivalents consist of bank balances and short term deposits maturing in less than 90 days. The Corporation manages credit risk related to short term deposits by investing only in Canadian or U.S. government treasury bills or term deposits at BNP Paribas and Royal Bank of Canada, and therefore the Corporation considers these assets to have negligible credit risk.Deposits are held with financial institutions maturing in less than one year.A substantial portion of the Corporation's accounts receivable are with customers in the oil industry and are subject to normal industry credit risks. The carrying amount of accounts receivable reflects management's assessment of the credit risk associated with these accounts. Crude oil production is sold, as determined by market based prices adjusted for quality differentials.Receivables from crude oil sales are normally collected 20 days after the month of production. The Corporation's policy to mitigate credit risk associated with crude oil sales is to establish marketing arrangements with large purchasers. The Corporation historically has not experienced any collection issues with its crude oil customers. As at June 30, 2010, the Corporation had receivables of $8.1 million from a large counterparty for crude oil sales.As at June 30, 2010, none of the Corporation's accounts receivables are past due.Liquidity RiskLiquidity risk is the risk that the Corporation will not be able to meet its financial obligations as they become due. The Corporation manages liquidity risk by regularly updating cash flow budgets in order to monitor future capital requirements.The Corporation prepares annual capital and operating budgets which are regularly monitored and updated as necessary. Crude oil production is closely monitored and various future production and price scenarios are reviewed and incorporated in the cash flow budgets.Accounts payable are normally payable within 30 days and accrued liabilities will normally be payable within two to three months. The following are the contractual maturities of financial liabilities as at June 30, 2010: less than Financial Liabilities 1 Year 1-2 Years 2-5 Years Thereafter Total ---------------------------------------------------------------------------- Accounts payable and accrued liabilities $ 33,676 - - - $ 33,676 Risk management contracts 1,550 - - - 1,550 ---------------------------------------------------------------------------- $ 35,226 - - - $ 35,226 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Foreign Currency RiskForeign currency risk is the risk that future cash flows will fluctuate as a result of changes in foreign currency exchange rates. The Corporation is exposed to foreign currency fluctuations as some expenditures are denominated in Colombian pesos and Canadian dollars. The Corporation does not attempt to manage this exchange risk. As at June 30, 2010, had the U.S. dollar appreciated or depreciated by five percent against the Colombian peso, with all other variables held constant, net income for the period would have approximately increased $0.2 million or decreased $0.2 million. As at June 30, 2010, had the U.S. dollar appreciated or depreciated by one cent against the Canadian dollar, net income for the period would have approximately decreased $0.5 million or increased $0.5 million. The Corporation had no forward exchange rate contracts in place as at or during the three and six months ended June 30, 2010 and 2009.Interest Rate RiskInterest rate risk arises from changes in market interest rates. The Corporation is exposed to interest rate cash flow risk on floating interest rate bank debt to the extent it is drawn. The Corporation's sensitivity to interest rates is currently immaterial. NOTE 7 - CHANGES IN NON-CASH WORKING CAPITAL Three months ended Six months ended June 30, June 30, ---------------------------------------- 2010 2009 2010 2009 ---------------------------------------------------------------------------- Change in: Accounts receivable $ (5,991) $ (3,885) $ (5,201) $ (6,327) Inventories 501 - (2,116) - Prepaids and deposits 11 518 36 601 Accounts payable and accrued liabilities 7,963 (2,470) 18,954 (9,065) Capital lease obligation (25) (44) (63) (74) ---------------------------------------------------------------------------- $ 2,459 $ (5,881) $ 11,610 $(14,865) ---------------------------------------------------------------------------- Changes related to: Operating activities $ (6,706) $ (4,113) $ (1,008) $(11,925) Financing activities $ (595) $ (2) $ 10 $ 55 Investing activities $ 9,760 $ (1,766) $ 12,608 $ (2,995) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- NOTE 8 - RELATED PARTY TRANSACTIONSOffice rent for the three months ended June 30, 2010 of $14,982 (June 30, 2009 - $13,476) and for the six months ended June 30, 2010 of $29,861 (June 30, 2009 - $25,986) was paid to a company where a director of the Corporation is a director, and are included in administrative expenses.These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.NOTE 9 - INVESTMENT IN AND CONSOLIDATION OF C&C ENERGY (BARBADOS) LTD.Under the terms of the Reorganization, among C&C Canada and the shareholders of C&C Barbados, the Corporation acquired all of the shares of C&C Barbados (which holds 100% of the outstanding common shares of C&C Grupo).The investment in C&C Barbados was formerly accounted for on the equity basis of accounting. Equity accounting was discontinued with the Corporation consolidating the financial results C&C Barbados on May 25, 2010 as follows: ---------------------------------------------------------------------------- Cash and cash equivalents $ 22,617 Accounts receivable 8,908 Inventories 2,886 Prepaids and deposits 527 Future income tax assets 457 Capital assets 148,701 Risk management contracts 299 Accounts payable and accrued liabilities (26,286) Intercompany 149 Current portion of capital lease obligation (27) Risk management contracts (1,905) Future income tax liability (106) Asset retirement obligation (4,532) Retained earnings (19,375) ---------------------------------------------------------------------------- Changes in net assets $ 132,313 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Investment in C&C Energy (Barbados) Ltd. Continuity: ---------------------------------------------------------------------------- Investment in C&C Energy (Barbados) Ltd. - Balance at December 31, 2009 $ 58,542 Equity income in C&C Energy (Barbados) Ltd. from January 1, 2010 to May 25, 2010 7,533 Net equity in C&C Energy (Barbados) Ltd. (Note 2) 66,238 ---------------------------------------------------------------------------- Investment in C&C Energy (Barbados) Ltd. - Balance at May 25, 2010 pre-Reorganization $ 132,313 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- NOTE 10 - COMMITMENTS AND CONTINGENCIESThe Corporation has outstanding commitments amounting to $8.8 million on three exploration and production blocks or technical evaluation areas. These commitments include drilling of an exploration well on the Pajaro Pinto block by September 2011 ($1.3 million net commitment); drilling of an exploration well on the Coati block within four months of receiving the environmental license ($3.5 net commitment); and drilling of an exploration well, acquisition of 82 kilometers 2D seismic and 30 square kilometers of 3D seismic on the Llanos 19 block to be completed by March 2011 (net commitment $4.0 million).In March 2010, the Corporation entered a pipeline transportation ship-or-pay agreement to transport a minimum of 2,500 barrels of oil per day at a $5 per barrel rate for an initial five-year term. The Corporation has the option, subject to capacity, to increase the daily minimum volume by 1,000 barrels of oil per day at the same $5 per barrel rate. The contract initially contemplated a May 1, 2010 completion date for the building of the Cusiana loading facility. However, as at the date of this report, construction of the loading facility had not commenced and the Corporation had received notification suspending the contract. The Corporation is engaged in ongoing discussions with OCENSA to determine whether or not construction will proceed. C&C Energia is investigating alternative arrangements, which, in the event the contract is cancelled, could result in the commitments associated with this contract being terminated.These work commitments are in the normal course of the Corporation's exploration business and the Corporation plans to fund these with existing cash balances, cash flow from operations and available credit facilities.The Corporation has issued guarantees totaling $3.4 million (December 31, 2009 - $2.8 million) to guarantee certain obligations on its exploration contracts. The guarantees are secured $2 million under the Corporation's credit facility and the remaining by term deposits held by the banks which are included under prepaids and deposits on the Corporation's consolidated balance sheet.The Corporation is involved in litigation and claims arising in the normal course of operations. Management is of the opinion that pending litigation will not have a material adverse impact on Corporation's financial position or results of operations.NOTE 11 - SUBSEQUENT EVENTSOn August 5, 2010 the Corporation converted the Andaquies block from a technical evaluation agreement to an E&P contract with the signing of a definitive agreement with the ANH. The Corporation has committed, within three years of being awarded the E&P Contract, to acquire 80 km of 2D seismic plus drill one exploratory well or acquire 100 km2 of 3D seismic for a total estimated cost of $5 million.FOR FURTHER INFORMATION PLEASE CONTACT: C&C Energia Ltd. Richard A. Walls President and Chief Executive Officer 403-262-6046 or C&C Energia Ltd. Ken Hillier Chief Financial Officer 403-262-6046