The Globe and Mail

Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Press release from CNW Group

BANKERS PETROLEUM ANNOUNCES 2010 FINANCIAL RESULTS

Tuesday, March 22, 2011

BANKERS PETROLEUM ANNOUNCES 2010 FINANCIAL RESULTS08:00 EDT Tuesday, March 22, 2011Record Year of Financial and Operating ResultsCALGARY, March 22 /CNW/ - Bankers Petroleum Ltd. ("Bankers" or the "Company") (TSX: BNK) (AIM: BNK) is pleased to provide its 2010 Financial Results and Outlook for 2011.In 2010, Bankers was successful in progressing its strategic objectives and achieved record production, reserves, earnings and cash flow through its largest annual capital investment in Albania, of US$122 million. << Results at a Glance (US$000, except as noted) Change 2010 2009 ------------------------------------------------------------------------- Oil revenue 97% 170,376 86,614 Net operating income 158% 81,103 31,496 Net income (loss) 96 x 14,265 (150) Funds generated from operations 188% 73,166 25,422 Capital expenditures 218% 122,012 38,324 December 31 ------------------- Change 2010 2009 ------------------------------------------------------------------------- Cash and deposits 58% 108,119 68,270 Working capital 74% 130,920 75,414 Total assets 53% 467,414 304,820 Bank loans (8%) 25,829 28,085 Shareholders' equity 60% 343,307 213,960 Average production (bopd) 49% 9,597 6,438 Average price ($/barrel) 32% 48.64 36.86 Netback ($/barrel) 73% 23.15 13.40 - Average production increased 49% to 9,597 bopd from 6,438 bopd in 2009. Exit production at year-end 2010 exceeded 12,100 bopd as compared to 8,100 bopd at year-end 2009. - A second and third drilling rig commenced operation in the Patos- Marinza oilfield in January and July 2010, respectively. A total of 55 wells were drilled and completed in 2010, of which 50 were horizontal oil wells. - Reserves in Albania increased at all levels: a 30% increase in the Original-Oil-In-Place (OOIP) assessment to 7.8 billion barrels from 6.0 billion barrels, an increase of 30% to 120 million barrels of proved reserves and, an 11% increase to 238 million barrels of proved plus probable reserves. Additionally, the Company's independent reservoir engineers assigned contingent and prospective resource oil estimates of 1.2 billion and 540 million barrels, respectively. The corresponding net present value (NPV) after tax (discounted at 10%) of the proved plus probable reserves increased by 30% to $2.0 billion from $1.5 billion. - In April 2010, the production sharing contract for the Block "F" exploration acreage application was finalized. The area contains several seismically defined structural and amplitude anomalies prospective for oil and natural gas. - On July 15, 2010, the Company completed a prospectus offering with a syndicate of underwriters and issued an aggregate of 12,903,228 common shares at a price of CAD$7.75 per common share on a bought deal basis, resulting in gross proceeds of $96.2 million. - The Company continues to maintain a strong balance sheet with cash of $108.1 million and working capital of $130.9 million at December 31, 2010 as compared to cash of $68.3 million and working capital of $75.4 million at December 31, 2009. >>OUTLOOKFor 2011, our continued focus is to increase reserves, production and maximize cash flow from operations. To achieve this, the Company will implement the following: << - Drill 66 horizontal and vertical wells and complete 120 well reactivations and work-overs at the Patos-Marinza oilfield. A fourth drilling rig is expected in the second quarter. - Increase production facilities to handle our target exit production rate of 20,000 bopd. - 2011 will be a milestone year for thermal development of the Patos- Marinza oilfield. Bankers will drill a vertical delineation well and two horizontal wells designed for high pressure and temperature steam injection, install a 25,000 BTU steam generator and all associated production facilities. - Complete Phase 1 (10 kilometres) of the 40 kilometre pipeline to Vlore and construction of the receiving hub in Fier. - Continue with the environmental stewardship and social initiatives in our area of operations. - Bankers is building a larger team of senior professionals to complement its existing team of engineers, geoscientists, production and support staff to manage another record capital program in 2011, currently budgeted at $215 million. >> For additional information, please see an updated version of the Company's corporate presentation on www.bankerspetroleum.comCaution Regarding Forward-looking InformationInformation in this news release respecting matters such as the expected future production levels from wells, future prices and netback, work plans, anticipated total oil recovery of the Patos-Marinza and Kuçova oilfields constitute forward-looking information. Statements containing forward-looking information express, as at the date of this news release, the Company's plans, estimates, forecasts, projections, expectations, or beliefs as to future events or results and are believed to be reasonable based on information currently available to the Company.Exploration for oil is a speculative business that involves a high degree of risk. The Company's expectations for its Albanian operations and plans are subject to a number of risks in addition to those inherent in oil production operations, including: that Brent oil prices could fall resulting in reduced returns and a change in the economics of the project; availability of financing; delays associated with equipment procurement, equipment failure and the lack of suitably qualified personnel; the inherent uncertainty in the estimation of reserves; exports from Albania being disrupted due to unplanned disruptions; and changes in the political or economic environment.Production and netback forecasts are based on a number of assumptions including that the rate and cost of well takeovers, well reactivations and well recompletions of the past will continue and success rates will be similar to those rates experienced for previous well recompletions/reactivations/development; that further wells taken over and recompleted will produce at rates similar to the average rate of production achieved from wells recompletions/reactivations/development in the past; continued availability of the necessary equipment, personnel and financial resources to sustain the Company's planned work program; continued political and economic stability in Albania; approval of the Addendum to the Plan of Development; the existence of reserves as expected; the continued release by Albpetrol of areas and wells pursuant to the Plan of Development and Addendum; the absence of unplanned disruptions; the ability of the Company to successfully drill new wells and bring production to market; and general risks inherent in oil and gas operations.Contingent resources disclosed herein represent those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations, using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. Prospective resources disclosed herein represent those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations, by application of future development projects.Forward-looking statements and information are based on assumptions that financing, equipment and personnel will be available when required and on reasonable terms, none of which are assured and are subject to a number of other risks and uncertainties described under "Risk Factors" in the Company's Annual Information Form and Management's Discussion and Analysis, which are available on SEDAR under the Company's profile at www.sedar.com.There can be no assurance that forward-looking statements will prove to be accurate. Actual results and future events could differ materially from those anticipated in such statements. Readers should not place undue reliance on forward-looking information and forward looking statements.Review by Qualified PersonThis release was reviewed by Abdel F. (Abby) Badwi, President & CEO of Bankers Petroleum Ltd., who is a "qualified person" under the rules and policies of AIM in his role with the Company and due to his training as a professional petroleum geologist (member of APEGGA) with over 40 years experience in domestic and international oil and gas operations.About Bankers Petroleum Ltd.Bankers Petroleum Ltd. is a Canadian-based oil and gas exploration and production company focused on developing large oil and gas reserves. In Albania, Bankers operates and has the full rights to develop the Patos-Marinza heavy oilfield and has a 100% interest in the Kuçova oilfield, and a 100% interest in Exploration Block F. Bankers' shares are traded on the Toronto Stock Exchange and the AIM Market in London, England under the stock symbol BNK. << MANAGEMENT'S DISCUSSION AND ANALYSIS >>The following is management's discussion and analysis (MD&A) of Bankers Petroleum Ltd.'s (Bankers or the Company) operating and financial results for the year ended December 31, 2010, compared to the preceding year, as well as information and expectations concerning the Company's outlook based on currently available information. The MD&A should be read in conjunction with the audited consolidated financial statements for the years ended December 31, 2010 and 2009, together with the notes related thereto. Additional information relating to Bankers, including its Annual Information Form (AIF), is on SEDAR at www.sedar.com and on the Company's website at www.bankerspetroleum.com. All dollar values are expressed in US dollars, unless otherwise indicated, and are prepared in accordance with Canadian generally accepted accounting principles (GAAP). The Company reports its heavy oil production in barrels.This MD&A is prepared as of March 22, 2011.NON-GAAP MEASURESNetback per barrel and its components are calculated by dividing revenue, royalties, operating and sales and transportation expenses by the gross production volume during the period. Netback per barrel is a non-GAAP measure but it is commonly used by oil and gas companies to illustrate the unit contribution of each barrel produced.Net operating income is similarly a non-GAAP measure that represents revenue net of royalties, operating and sales and transportation expenses. The Company believes that net operating income is a useful supplemental measure to analyze operating performance and provides an indication of the results generated by the Company's principal business activities prior to the consideration of other income and expenses.Funds generated from operations include all cash from operating activities and are calculated before change in non-cash working capital. Reconciliation to the GAAP measure is as follows: << ($000s) 2010 2009 ------------------------------------------------------------------------- Cash provided by operating activities 51,452 10,931 Change in non-cash working capital 21,714 14,491 -------------------------- Funds generated from operations 73,166 25,422 -------------------------- -------------------------- >>The non-GAAP measures referred to above do not have any standardized meaning prescribed by GAAP and therefore may not be comparable to similar measures used by other companies.CAUTION REGARDING FORWARD-LOOKING INFORMATIONThis MD&A offers our assessment of the Company's future plans and operations as of March 22, 2011 and contains forward-looking information. Such information is generally identified by the use of words such as "anticipate", "continue", "estimate", "expect", "may", "will", "project", "should", "believe" and similar expressions are intended to identify forward-looking statements. Statements relating to "reserves" or "resources" are also forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions that the resources and reserves described can be profitably produced in the future. All such statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. Management believes the expectations reflected in those forward-looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this MD&A should not be unduly relied upon. These statements speak only as of the date hereof.In particular, this MD&A contains forward-looking statements pertaining to the following: << - performance characteristics of the Company's oil and natural gas properties; - crude oil production estimates and targets; - the size of the oil and natural gas reserves and/or resources; - capital expenditure programs and estimates; - projections of market prices and costs; - supply and demand for oil and natural gas; - environmental liabilities associated with the Company's operations in Albania; - amendments to the Company's petroleum agreement relating to the Kuçova oilfield; - expectations regarding the ability to raise capital and to continually add to reserves through acquisitions and development; and - treatment under governmental regulatory regimes and tax laws. >>These forward-looking statements are based on a number of assumptions, including but not limited to: those set out herein and in the Company's Form 51-101F1 Statement of Reserves Data and Other Oil and Gas Information (NI 51-101 Report), availability of funds for capital expenditures, a consistent and improving success rate for well recompletions at the Patos-Marinza oilfield, the evaluation and the implementation of a successful plan of development relating to the Kuçova oilfield, increasing production as contemplated by the Plan of Development (PoD) and Addendum for the Patos-Marinza oilfield, stable costs, availability of equipment and personnel when required for the Company's operations, continuing favourable relations with Albanian governmental agencies and continuing strong demand for oil and natural gas.Actual results could differ materially from those anticipated in such forward-looking statements as a result of the risks and uncertainties set forth below: << - general economic, market and business conditions; - volatility in market prices for oil and natural gas; - risks inherent in oil and gas production operations including those relating to maintaining and increasing oil and gas production; - uncertainties associated with estimating oil and natural gas reserves; - competition for, among other things, capital, acquisitions of reserves, undeveloped lands and skilled personnel; - incorrect assessments of the value of acquisitions; - geological, technical, drilling and processing problems; - fluctuations in foreign exchange or interest rates and stock market volatility; - rising costs of labour and equipment; - failure to agree on terms to an amending agreement in regards to the Kuçova oilfield on terms acceptable to the Company, or at all; - changes in foreign laws and regulations including those related to tax laws and incentive programs relating to the oil industry; - environmental risks, including larger than expected environmental liabilities associated with the Company's operations in Albania; - the ability to implement corporate strategies; - the ability to obtain financing; - the state of domestic and international capital markets; - changes in oil acquisition and drilling programs; - failure to complete and/or realize the anticipated benefits of its acquisitions; and - delays resulting from, or inability to obtain, required regulatory approvals. >>The Company from time to time updates its forward-looking information based on the events and circumstances that occurred during the period and has adjusted its capital expenditure program accordingly to ensure that capital expenditures are funded by cash provided by operations, cash on hand and its available credit.Readers are cautioned that the foregoing lists of factors are not exhaustive. The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement.BUSINESS PROFILEBankers Petroleum Ltd. is a Canadian-based oil exploration and production company focused on maximizing the value of its heavy oil assets in Albania. The Company is targeting growth in production and reserves through application of new and proven technologies by an experienced technical team. All revenue is currently generated from its operations in Albania, which is located northwest of Greece in South Eastern Europe.In Albania, Bankers operates and has the full rights to develop the Patos-Marinza and Kuçova oilfields pursuant to License Agreements with the Albanian National Agency for Natural Resources (AKBN) and Petroleum Agreements with Albpetrol Sh.A (Albpetrol), the state owned oil and gas corporation. The licenses became effective in March 2006 and September 2009, respectively, each having a 25 year term with an option to extend at the Company's election for further five year increments. The Patos-Marinza oilfield is the largest onshore oilfield in continental Europe, holding approximately 7.5 billion barrels of original-oil-in-place (OOIP). The Company also has exclusive rights to exploration Block "F" (adjacent to the Patos-Marinza oilfield), a 185,000 acre oil and gas prone exploration field.OVERVIEW & SELECTED ANNUAL INFORMATION << ($000s, except as noted) Year ended December 31 ------------------------------------------------------------------------- Results at a Glance 2010 2009 2008 ------------------------------------------------------------------------- Financial Oil revenue 170,376 86,614 110,253 Net operating income 81,103 31,496 51,141 Net income (loss) 14,265 (150) (1,587) Basic/diluted earnings (loss) per share 0.060/0.058 (0.001) (0.009) Funds generated from operations 73,166 25,422 41,713 Additions to property, plant and equipment 122,012 38,324 78,378 Operating Average production (bopd) 9,597 6,438 5,875 Average price ($/barrel) 48.64 36.86 51.27 Netback ($/barrel) 23.15 13.40 23.78 Average Brent oil price ($/barrel) 79.50 61.67 97.02 December 31 --------------------------------------- 2010 2009 2008 --------------------------------------- Cash and deposits 108,119 68,270 20,107 Working capital (deficiency) 130,920 75,414 (7,387) Total assets 467,414 304,820 214,675 Bank loans 25,829 28,085 28,125 Shareholders' equity 343,307 213,960 125,358 >>During the year, Bankers increased its revenue, net operating income and funds generated from operations through its continued success with the horizontal drilling program and ongoing well reactivations. The average oil sales price received by the Company during the year was $48.64/bbl, a 36% increase from $36.86/bbl in 2009. Higher average oil prices, in conjunction with keeping overall production costs relatively consistent, resulted in a 73% increase in the average 2010 netback to $23.15/bbl from $13.40/bbl in 2009. On average, the oil price received by the Company in 2010 represented approximately 61% of the Brent oil price, a modest improvement from 60% in 2009. Contracts for 2011 sales now average 65% of the Brent oil price. Oil exports increased to 85% in 2010, from 82% of total sales in 2009, with the balance supplying the domestic Albanian refineries.Consolidated capital expenditures increased to $122.0 million in 2010 as compared to $38.3 million in 2009 and $78.4 million in 2008.Shareholders' equity increased to $343.3 million in 2010 from $214.0 million in 2009 and $125.4 million in 2008. The increase in shareholders' equity in 2010 was due to the new equity issue in July 2010 and exercises of warrants and options throughout the year.HighlightsBankers accomplished several key achievements during 2010: << - Average production increased 49% to 9,597 bopd from 6,438 bopd in 2009. Exit production at year-end 2010 exceeded 12,100 bopd as compared to 8,100 bopd at year-end 2009. - On July 15, 2010, the Company completed a prospectus offering with a syndicate of underwriters and issued an aggregate of 12,903,228 common shares at a price of CAD$7.75 per common share on a bought deal basis, resulting in gross proceeds of $96.2 million. - The Company continues to maintain a strong balance sheet with cash of $108.1 million and working capital of $130.9 million at December 31, 2010 as compared to cash of $68.3 million and a working capital of $75.4 million at December 31, 2009. - A second and third drilling rig commenced operation in the Patos- Marinza oilfield in January and July 2010, respectively. A total of 55 wells were drilled and completed in 2010, of which 50 were horizontal wells. - In April 2010, the production sharing contract for the Block "F" exploration acreage application was finalized. The area contains several seismically defined structural and amplitude anomalies prospective for oil and natural gas. - Reserves in Albania increased at all levels: a 30% increase in OOIP assessment to 7.8 billion barrels from 6.0 billion barrels, an increase of 11% to 238 million barrels of proved plus probable reserves and an increase of 1% to 427 million barrels of proved, probable and possible reserves. Additionally, the Company's independent reservoir engineers assigned contingent and prospective resource oil estimates of 1.2 billion and 540 million barrels, respectively. The corresponding net present value (NPV) after tax (discounted at 10%) of the proved plus probable reserves increased by 30% to $2.0 billion from $1.5 billion. >>GROWTH STRATEGYBankers' strategy is focused on petroleum assets that have long-life reserves with production growth potential. Employing its knowledge base and technical expertise, the Company is working to optimize its existing assets from the application of primary, secondary and enhanced oil recovery (EOR) extraction technologies, creating long-term value for shareholders. This will be accomplished through the attainment of its main objectives: increasing production, reserves, funds generated from operations and net asset value.Bankers' strategic priorities are to: << - Increase reserves and production; - Maintain a strong balance sheet by controlling debt and managing capital expenditures; - Control costs through efficient management of operations; - Pursue new and proven technology applications to improve operations and assist exploration endeavours; - Expand infrastructure (pipelines, storage, treating capacity) to increase production capacity in a cost-effective manner; - Explore undeveloped acreage to identify and create development opportunities; - Maintain a strong focus on employee, contractor and community health and safety; and - Manage environmental and social performance to minimize negative ecological impacts and ensure continued stakeholder support. >>In pursuing the long-term growth strategy, Bankers is primarily focused on accessing the heavy oil upside from its Albanian assets, which includes the effective implementation of the Patos-Marinza development plan as well as applying enhanced oil recovery (EOR) and secondary extraction techniques to increase the field's recoverable reserves.In addition, the Company's strategy involves identifying and acquiring other potential petroleum opportunities in Albania to increase overall value. During the year, negotiations to finalize the Production Sharing Contract for Block "F" exploration acreage were concluded. The area contains several seismically defined structures and amplitude anomalies prospective for oil and natural gas.Throughout the year, Bankers focused on achieving its priorities and implementing its capital programs in Albania. The Company funded its capital programs using funds generated from operations and existing cash. Strategic allocation of the work program and budget is designated to provide additional recoverable reserves at the Patos-Marinza and Kuçova oilfields and still achieve an appropriate growth in production.Key Performance IndicatorsKey performance indicators relate to those factors that Bankers can directly affect, and are indicators of the Company's ability to provide long-term value to its shareholders, which include optimizing the cost of operations over time, improving exploration and development and increasing operational performance through technology and best practices. Key measurements include operating costs, production volumes and safety performance. These key performance indicators are continuously reviewed and monitored.In addition, strengthening relationships with employees, governments, communities and other stakeholders are important aspects of the business for Bankers. The effective management of these relationships allows the Company to tap into new growth opportunities and efficiently develop operations for the future.CAPABILITY TO DELIVER RESULTSActivity in the oil industry is subject to a range of external factors that are difficult to actively manage, including commodity prices, resource demand, regulator and environmental regulations and climate conditions. Bankers gives significant consideration to these factors and backs-up its strategy by employing and positioning necessary resources to deliver on its goals and commitment to increase value for shareholders. The Company focuses its capital on opportunities that provide the potential for the best returns. Comprehensive insurance policies are in place to help safeguard its assets, operations and employees. Relationships with stakeholders and key partners are carefully cultivated to assist in the Company's future development and growth. The experiences of management and its technical team ensure that the Company can fulfill its commitment to deliver maximum value to its shareholders.INDUSTRY & ECONOMIC FACTORSCommodity price and foreign exchange benchmarks for the past two years are as follows: << 2010 2009 ------------------------------------------------------------------------- Brent average oil price ($/barrel) 79.50 61.67 US/ Canadian dollar year end exchange rate 0.9946 1.0466 US/ Canadian dollar average exchange rate 1.0299 1.1420 >>The world crude oil prices strengthened during the course of 2010. Average Brent oil prices improved from $76/bbl in the first quarter to $86/bbl in the fourth quarter of 2010.In 2010, Bankers generated 85% of its crude oil revenue from sales to international markets. The remainder was sold to ARMO, an independent petroleum refiner in Albania. Both the domestic and international selling prices are based on the Brent oil price. The Company has not entered into any commodity derivative contracts as at or during the year ended December 31, 2010.The fluctuation in Canadian dollar mirrored that of oil prices in 2010. The appreciation of the Canadian dollar against its US counterpart was most significant in the second part of 2010. On an average basis, the Canadian dollar strengthened by 10% in 2010.The fluctuations in the foreign exchange currencies impacted cash and some short-term investments that are denominated in Canadian dollars. The strengthening of the Canadian dollar after the July 2010 equity financing was largely responsible for a foreign exchange gain of $5.2 million in 2010.Significant Developments in 2010Bankers accomplished several key achievements in 2010 in response to improvements in the commodity market. These events included expansion of the horizontal drilling program by activating a second and third rig; completion of a bought deal equity issue in July; construction of extra tankage at the Port of Vlore export terminal and the overall growth of capital programs.During the year, Bankers activated a second and third drilling rig, enabling the Company to drill additional vertical delineation wells in the western extension of the field, as well as thermal pilot wells, contributing to the growth of its horizontal programs. A total of 55 wells were drilled and completed in 2010, of which 50 were horizontal wells.On July 15, 2010, the Company completed a prospectus offering with a syndicate of underwriters and issued an aggregate of 12,903,228 common shares at a price of CAD$7.75 per common share on a bought deal basis, resulting in gross proceeds of $96.2 million.In 2010, Bankers commenced construction of the extra tankage at the Port of Vlore export terminal. This facility will increase the storage capacity from 80,000 barrels to 160,000 barrels, improving the export shipping logistics and enabling larger crude oil cargoes.QUARTERLY SUMMARYBelow is a summary of Bankers' performance over the last eight quarters. << 2010 ----------------------------------------------------- ($000s, except as noted) First Quarter Second Quarter Third Quarter ------------------------------------------------------------------------- $/bbl $/bbl $/bbl ------------------------------------------------------------------------- ------------------------------------------------------------------------- Average production (bopd) 8,282 9,830 9,826 ------------------------------------------------------------------------- Oil revenue 35,149 47.16 42,147 47.12 42,135 46.61 Royalties 7,190 9.65 8,367 9.35 8,284 9.16 Operating expenses 7,925 10.63 8,892 9.94 9,401 10.40 Sales and transportation 4,395 5.90 4,535 5.07 4,804 5.31 ----------------------------------------------------- Net operating income 15,639 20.98 20,353 22.76 19,646 21.74 ----------------------------------------------------- ----------------------------------------------------- 2010 ----------------------------------- ($000s, except as noted) Fourth Quarter Year ------------------------------------------------------- $/bbl $/bbl ------------------------------------------------------- ------------------------------------------------------- Average production (bopd) 10,424 9,597 ------------------------------------------------------- Oil revenue 50,945 53.12 170,376 48.64 Royalties 9,841 10.26 33,682 9.62 Operating expenses 10,526 10.98 36,744 10.49 Sales and transportation 5,113 5.33 18,847 5.38 ----------------------------------- Net operating income 25,465 26.55 81,103 23.15 ----------------------------------- ----------------------------------- 2009 ----------------------------------------------------- ($000s, except as noted) First Quarter Second Quarter Third Quarter ------------------------------------------------------------------------- $/bbl $/bbl $/bbl ------------------------------------------------------------------------- ------------------------------------------------------------------------- Average production (bopd) 5,864 6,383 6,258 ------------------------------------------------------------------------- Oil revenue 13,052 24.73 20,107 34.63 23,441 40.71 Royalties 3,486 6.61 5,389 9.28 5,368 9.32 Operating expenses 5,512 10.44 5,748 9.90 6,083 10.56 Sales and transportation 1,426 2.70 2,003 3.45 2,739 4.76 ----------------------------------------------------- Net operating income 2,628 4.98 6,967 12.00 9,251 16.07 ----------------------------------------------------- ----------------------------------------------------- 2009 ----------------------------------- ($000s, except as noted) Fourth Quarter Year ------------------------------------------------------- $/bbl $/bbl ------------------------------------------------------- ------------------------------------------------------- Average production (bopd) 7,234 6,438 ------------------------------------------------------- Oil revenue 30,014 45.10 86,614 36.86 Royalties 6,225 9.35 20,468 8.71 Operating expenses 7,438 11.18 24,781 10.55 Sales and transportation 3,701 5.56 9,869 4.20 ----------------------------------- Net operating income 12,650 19.01 31,496 13.40 ----------------------------------- ----------------------------------- 2010 ($000s, ------------------------------------------------------------ except First Second Third Fourth as noted) Quarter Quarter Quarter Quarter Year ------------------------------------------------------------------------- Financial Funds generated from operations 13,819 18,792 16,571 23,984 73,166 Net income 470 2,694 4,267 6,834 14,265 Basic/ diluted earnings per share 0.002 0.012/0.011 0.018/0.017 0.028/0.028 0.060/0.058 General and administrative 1,926 1,789 1,927 2,613 8,255 Total assets 330,371 339,661 445,774 467,414 467,414 Capital expenditures 26,700 29,262 27,991 38,059 122,012 Bank loans 26,418 27,330 23,887 25,829 25,829 2009 ($000s, ------------------------------------------------------------ except First Second Third Fourth as noted) Quarter Quarter Quarter Quarter Year ------------------------------------------------------------------------- Financial Funds generated from operations 1,265 5,998 7,371 10,788 25,422 Net income (loss) (2,492) (1,679) 1,708 2,313 (150) Basic/ diluted earnings (loss) per share (0.014) (0.009) 0.008 0.010 (0.001) General and administrative 1,204 2,079 1,410 1,757 6,450 Total assets 210,674 257,689 292,212 304,820 304,820 Capital expenditures 2,835 6,126 12,104 17,259 38,324 Bank loans 26,948 32,651 31,355 28,085 28,085 ------------------------------------------------------------- DISCUSSION OF OPERATING RESULTS Production, Revenue and Netback 2010 2009 % ------------------------------------------------------------------------- Average production (bopd) 9,597 6,438 49 Oil revenue ($000s) 170,376 86,614 97 Netback ($/bbl) Average price 48.64 36.86 32 Royalties 9.62 8.71 10 Operating expenses 10.49 10.55 (1) Sales and transportation 5.38 4.20 28 ----------------------------------- Netback 23.15 13.40 73 ----------------------------------- ----------------------------------- >>During 2010, average production increased 49% to 9,597 bopd from 6,438 bopd for 2009. The exit production rate exceeded 12,100 bopd at 2010 year-end compared to 8,100 at the preceding year-end.The increase in production was due to the expansion of the drilling program, continued well reactivation program and well recompletion program focused on bringing high productivity wells on stream. In 2010, a total of 55 wells were drilled and completed, of which 50 were horizontal wells.As of December 31, 2010, the Company had 826 wells in inventory, an increase of 254 wells compared to 572 at the end of 2009. Of these 254 wells, 55 were new wells drilled during 2010 and 199 were taken-over from Albpetrol as the area of development was expanded. The majority of the wells taken-over during the year were part of a consolidation effort to reduce Albpetrol activities in the primary focus areas for future Bankers' development. As such, the majority of these wells were not reactivated with progressing cavity pumping systems in 2010. Of the total 826 wells in inventory at year-end, 445 are producing wells, 9 are water disposal wells and 372 are non-active wells.In April 2010, Bankers resumed its oil sales to two Albanian refineries operated by ARMO, a domestic petroleum refiner. Under the ARMO crude oil sales contract, the pricing is competitive with export sales. In 2010, Bankers exported 85% of its crude at an average price of $48.94/bbl.On average, the Company received $48.64/bbl for the year, an increase of 32% from $36.86/bbl for the preceding year. This increase was largely due to the increase in commodity prices. The average Brent oil price for 2010 was $79.50/bbl, compared to $61.67/bbl in 2009, an improvement of 29%. Oil revenue increased 97% to $170.4 million in 2010 compared to $86.6 million in 2009.The Company achieved record average production of 10,424 bopd during the fourth quarter of 2010 compared to 9,826 bopd during the preceding quarter and 7,234 bopd during the fourth quarter of 2009. In the fourth quarter of 2010, revenue increased 21% and 70%, respectively, compared to the preceding quarter and the same period in 2009. The increase was mainly due to the improvement of oil prices and increased production. The Company received an average sales price of $53.12/bbl during the fourth quarter compared to $46.61/bbl in the third quarter and $45.10/bbl over the same period in 2009, an increase of 14% and 18%, respectively. The Company exported 80% of its crude oil during the fourth quarter compared to 84% during the preceding quarter and 100% during the same period in 2009.The netback during the fourth quarter of 2010 was $26.55/bbl compared to $21.74/bbl for the preceding quarter and $19.01/bbl for the fourth quarter of 2009, an increase of 22% and 40% respectively.RoyaltiesRoyalties in Albania are calculated pursuant to the Petroleum Agreement with Albpetrol and consist of a royalty based on Albpetrol's pre-existing production (PEP), a 1% gross overriding royalty (ORR) on new production and a 10% royalty tax (RT) on net production. Overall royalties for the year represented 20% of oil revenue, as compared to 24% for the preceding year. The decrease was due to increased production from new wells. As a percent of revenue, the various royalty components currently represent 10% from PEP, 1% for the ORR and 9% for the RT. Fluctuations in royalty on a per barrel basis are due to changes in the underlying oil prices.Royalties for the fourth quarter were $10.26/bbl (19% of revenue) compared to $9.16/bbl (20% of revenue) during the preceding quarter and $9.35/bbl (21% of revenue) for the same period in 2009. The average royalty rate declined during the quarter as more oil was produced from new production compared to the preceding quarter and the same period in 2009.Operating ExpensesOperating expenses for the year were $10.49/bbl, slightly reduced from $10.55/bbl in 2009. On a percentage of revenue basis, operating costs represented 22% of the revenue for the year, compared to 29% for the preceding year. The improvement was due to the increase in production levels, efficiency in well servicing costs and the increase in commodity prices.Operating expenses during the fourth quarter were $10.98/bbl compared to $10.40/bbl during the third quarter and $11.18/bbl during the same period in 2009. The moderate increase in operating expenses compared to the preceding quarter was a result of increased fuel costs and increased workover costs.Sales and TransportationSales and transportation (S&T) costs for the year increased to $5.38/bbl from $4.20/bbl for 2009, mainly due to the increase in export sales and facility fees during the year and increased use of diesel in blending to alleviate diluent supply limitations.S&T expenses during the fourth quarter were $5.33/bbl compared to $5.31/bbl during the preceding quarter and $5.56/bbl in the fourth quarter of 2009. The reduction in S&T compared to the same period in 2009 was mainly due to the increase of domestic sales which incurred lower S&T costs. The export sales were 80% of total sales for the fourth quarter, 84% for the preceding quarter and 100% for the same period in 2009.General and Administrative ExpensesGeneral and administrative (G&A) expenses for the year were $8.3 million, net of capitalization, compared to $6.5 million in 2009, an increase of 28%. The increase in G&A resulted mainly from the currency impact of the stronger Canadian dollar in comparison to the US dollar, as well as increases in professional fees, personnel costs and travel costs.The 2010 G&A costs represented $2.36/bbl, a 14% reduction from $2.74/bbl in 2009. The reduction in G&A on a per barrel basis was attributed to the production increase in 2010.During the year, the Company capitalized $10.1 million of G&A and stock based compensation compared to $3.9 million for the preceding year. These expenses were directly related to acquisition, exploration and development activities in Albania.Non-cash stock-based compensation expense pertaining to stock options granted to officers, directors, employees and service providers were $14.7 million (2009 - $6.5 million). Of this amount, $8.1 million (2009 - $4.5 million) was charged to earnings and $6.6 million (2009 - $2.0 million) was capitalized.G&A expenses for the fourth quarter of 2010 were $2.6 million compared to $1.9 million in the preceding quarter and $1.8 million for the same period in 2009. The increase was mainly due to strengthening of the Canadian dollar against the US dollar compared to the preceding quarter and the same period in 2009, as well as increases in personnel and travel costs during the fourth quarter of 2010.Depletion, Depreciation and AccretionDepletion, depreciation and accretion (DD&A) expenses for the year were $27.5 million ($7.86/bbl) compared to $16.2 million ($6.90/bbl) for 2009. The increase in DD&A expenses reflects higher production in Albania and an increase in depletable assets, inclusive of higher future capital requirements. The Company's independent reserve evaluation prepared in accordance with the National Instrument NI 51-101 assessed proved gross reserves of 120.2 million barrels at December 31, 2010, compared to 92.8 million barrels at December 31, 2009.DD&A costs for the quarter ended December 31, 2010 were $10.7 million, compared to $6.0 million for the preceding quarter and $4.4 million for the same period in 2009. The increase in DD&A reflects the higher depletion base as a result of increased future development costs, and the increase in production during the quarter. Depletion expenses represented $10.81/bbl for the quarter compared to $6.37/bbl and $6.20/bbl for the preceding quarter and the same period in 2009, respectively.Future Income Tax ExpenseFuture income tax liabilities result from the temporary differences between the carrying value and tax values of Albanian assets and liabilities. As of December 31, 2010, the Company recorded a $69.5 million future income tax liability, compared to $39.4 million at the end of the previous year, in relation to the Company's Albanian assets and liabilities. The Company incurred a future income tax expense of $23.5 million for the year compared to $5.9 million for 2009 due to increased earnings. On a quarterly basis, the Company recorded a future income tax expense of $6.1 million compared to $5.5 million for the preceding quarter and $2.7 million for the same period in 2009. Bankers is presently not required to pay cash taxes in any jurisdiction. The Company's cost recovery pool in Albania is $152.6 million. In Canada, the Company has non-capital losses of approximately $27.4 million, the benefit of which has not been recognized in the financial statements.Net Income (Loss) and Funds Generated from OperationsThe Company recorded net income of $14.3 million ($0.060 per share) during the year ended December 31, 2010 and a net loss of $0.2 million ($0.001 per share) for the year ended December 31, 2009.The Company realized net income of $6.8 million for the fourth quarter compared to net income of $4.3 million in the preceding quarter and $2.3 million for the same period in 2009.Funds generated from operations amounted to $73.2 million for the year ended December 31, 2010 compared to $25.4 million in 2009. The increase in funds generated from operations was mainly due to higher production and commodity prices during in the year.Funds generated from operations were $24.0 million for the fourth quarter compared to $16.6 million in the third quarter and $10.8 million for the same period in 2009.OIL RESERVESAnnually, the Company obtains independent reserves evaluations of its Albanian properties by RPS Energy Canada Ltd. (Patos-Marinza oilfield) and by DeGolyer and MacNaughton Canada Ltd. (Kuçova oilfield). At December 31, 2010, reserves increased on a total proved (1P), total proved plus probable (2P) and total proved, probable and possible (3P) basis. Changes within each reserve basis are shown below. The 2010 finding and development costs for the Albanian properties represented $10.06/bbl on a 1P basis, $5.80/bbl on a 2P basis and $3.85/bbl on a 3P basis. << Gross Oil Reserves- Using Forecast Prices (Mbbls) ----------------------------- ------------------- 2010 ----------------------------- 2009 Patos- Total Total Marinza Kuçova Albania Albania % ----------------------------------------------------- ------------------- Proved Developed Producing 17,300 0 17,300 22,900 (24) Developed Non-Producing 0 0 0 0 - Undeveloped 99,700 3,239 102,939 69,939 47 ----------------------------- ------------------- Total Proved 117,000 3,239 120,239 92,839 30 Probable 109,200 8,177 117,377 121,077 (3) ----------------------------- ------------------- Total Proved Plus Probable 226,200 11,416 237,616 213,916 11 Possible 168,400 20,587 188,987 208,387 (9) ----------------------------- ------------------- Total Proved, Probable & Possible 394,600 32,003 426,603 422,303 1 ----------------------------------------------------- ------------------- Net Present Value at 10% - After Tax Using Forecast Prices ($millions) ----------------------------- ------------------- 2010 ----------------------------- 2009 Patos- Total Total Marinza Kuçova Albania Albania % ----------------------------------------------------- ------------------- Proved Developed Producing 220.0 0.0 220.0 149.0 48 Developed Non-Producing 0.0 0.0 0.0 0.0 - Undeveloped 710.0 19.0 729.0 376.8 93 ----------------------------- ------------------- Total Proved 930.0 19.0 949.0 525.8 80 Probable 904.0 115.0 1,019.0 993.1 3 ----------------------------- ------------------- Total Proved Plus Probable 1,834.0 134.0 1,968.0 1,518.9 30 Possible 1,278.0 306.2 1,584.2 1,513.7 5 ----------------------------- ------------------- Total Proved, Probable & Possible 3,112.0 440.2 3,552.2 3,032.6 17 ----------------------------------------------------- ------------------- >>In the Patos-Marinza oilfield, the OOIP at the end of 2010 increased 32% to 7.5 billion barrels from 5.7 billion at the end of 2009. Additionally, the Company's independent reservoir engineers assigned contingent and prospective resource oil estimates of 1.2 billion and 540 million barrels, respectively. This represents the initial assessment of such resources attributed to future thermal recovery technologies and secondary water flood recovery methods at the Patos-Marinza oilfield.The reserves growth is primarily attributable to increased resource levels, improved well performance, the Company's 2010 horizontal development drilling success and increased commodity prices. This is reflected in the upgrade of 2P and 3P reserves into the 1P and 2P reserves categories, respectively, and the expansion of 3P reserves. All of Patos-Marinza's 2010 reserves estimates are from primary recovery methods.The Company acquired the Kuçova asset in 2008 and the OOIP resource estimate is 297 million barrels. This property is currently in early stage development and there was no Company production from the Kuçova oilfield in 2010 and only minor field activities were performed. Bankers expects to commence activity in this area in 2011 utilizing a variety of extraction techniques that will lead to creation of a development plan.CAPITAL EXPENDITURES << ($000s) 2010 2009 ------------------------------------------------------------------------- Drilling program $ 69,572 $ 16,451 Well reactivations 8,439 6,704 Work-over program 11,175 5,549 Evaluation area & thermal 8,310 - Base program Facility infrastructure 1,163 5 Water control/disposal 7,049 4,784 Environmental stewardship 1,363 82 Pipeline/sales infrastructure 7,068 715 Ecology pits/remediation 1,988 1,271 Other 3,540 2,207 Field equipment 2,345 556 -------------------------- $ 122,012 $ 38,324 -------------------------- -------------------------- >>Capital expenditures for the year were $122.0 million, compared to $38.3 million in the preceding year, an increase of 218%. This increase was due to the expansion of the Company's capital programs in drilling, work-overs, reactivation and other projects. During the year, Bankers spent $69.6 million on the drilling program for 50 horizontal wells and 2 vertical wells, compared to $16.5 million in 2009 (10 horizontal wells). Bankers spent $8.4 million on well reactivations compared to $6.7 million in the previous year. The increase in well-reactivation costs was a direct result of the increase of wells taken over from Albpetrol. In 2010, a total of 199 wells were taken over from Albpetrol, compared to 80 in 2009. The Company invested $8.3 million on the new evaluation area and thermal project in 2010, which consist of the drilling of 3 vertical wells and the reactivation projects, nil in 2009. Base program expenditures increased 155% during the year due to the increase in sales infrastructure, water control/disposal initiatives, environmental stewardship and facility infrastructure. Included in the year-end property, plant and equipment amounts are field equipment of casing, tubing and other equipment of $17.5 million at December 31, 2010 (2009 - $15.2 million) to be used for future drilling and reactivation programs in Albania.During the fourth quarter of 2010, Bankers incurred $38.1 million in capital expenditures; $23.4 million on drilling operations, $3.1 million on well reactivations and $5.9 million related to the base program. The balance of the expenditures was incurred on the work-over program, new evaluation area and thermal projects and other miscellaneous expenses and capitalized G&A. By comparison, in the fourth quarter of 2009, the Company incurred $17.3 million in capital expenditures; $6.7 million on drilling operations, $2.7 million on well reactivations and $6.3 million on the base program, with the balance of the expenditures incurred on miscellaneous expenses and capitalized G&A.LIQUIDITY AND CAPITAL RESOURCESAt December 31, 2010, Bankers had working capital of $130.9 million (including cash and deposits totalling $108.1 million) and long-term debt of $21.8 million. As of December 31, 2009, the Company had working capital of $75.4 million and a long-term debt of $23.4 million. The improvement in working capital compared to the same period in 2009 was mainly due to the equity issuance and exercises of warrants and options throughout the year.On July 15, 2010, the Company completed a prospectus offering with a syndicate of underwriters and issued an aggregate of 12,903,228 common shares at a price of CAD$7.75 per common share on a bought deal basis, resulting in gross proceeds of $96.2 million.On December 31, 2010, Bankers had credit facilities totalling $136.1 million, of which only $25.8 million was utilized. The majority represents a reserve-based long-term facility of $110.0 million from the International Finance Corporation and European Bank for Reconstruction and Development, from which no advances have yet been drawn. The $26.1 million Raiffeisen Bank facility includes a revolving operating loan of $20.0 million (due in March 2012) and term loans totalling $6.1 million. Repayments of $4.6 million were made on the term loans during the year.The Company's approach to managing liquidity is to ensure a balance between capital expenditure requirements and cash provided by operations, available credit facilities and working capital.There were approximately 245 million and 247 million shares outstanding as of December 31, 2010 and March 22, 2011, respectively. In addition, the Company had approximately 15 million stock options and 5 million warrants outstanding as of December 31, 2010. Subsequent to 2010 year-end, approximately 5 million stock options were granted and approximately 2 million stock options were exercised, generating proceeds of approximately $3.1 million. On March 22, 2011, Bankers has approximately 17 million stock options and 5 million warrants outstanding. The warrants expire on March 1, 2012 and are exercisable into common shares at CAD$2.37 per share, representing approximately CAD$11.5 million.Officers and executives of the Company represent approximately 7 percent ownership in the Company on a fully diluted basis. This creates an alignment with shareholders and a team that is dedicated to activities that support future value creation.In Albania, the Company considers any amounts greater than 60 days as past due. The amount past due has been received subsequent to year end and is not considered to be impaired.Plan of DevelopmentBankers has no capital expenditure commitment for the Patos-Marinza oilfield under the Petroleum Agreement. The Company annually submits a work program to AKBN which includes the nature and the amount of capital expenditures to be incurred during that year. Significant deviations in this annual program from the Plan of Development will be subject to AKBN approval. The Petroleum Agreement provides that disagreements between the parties will be referred to an independent expert whose decision will be binding. The Company has the right to relinquish a portion or all of the contract area. If only a portion of the contract area is relinquished then the Company will continue to conduct petroleum operations on the portion it retains and the future capital expenditures will be adjusted accordingly.CommitmentsThe Company has long-term lease commitments in Canada and Albania. The minimum lease payments for the next five years are $3.8 million as follows: << ($000s) Albania Canada Total ------------------------------------------------------------------------- 2011 $ 557 $ 709 $ 1,266 2012 425 541 966 2013 318 528 846 2014 318 44 362 2015 318 - 318 ------------------------------------ $ 1,936 $ 1,822 $ 3,758 ------------------------------------ ------------------------------------ >>The Company has two term loans totalling $6.1 million with a European financial institution that is repayable in equal monthly instalments of $0.4 million until October 31, 2011 and $74,100 until April 2014. Of the amount outstanding, $4.0 million is classified as current and $2.1 million as long-term. Principal repayments of the term loan over the next four years are as follows: << ($000s) ------------------------------------------------------------ 2011 $ 4,014 2012 889 2013 889 2014 296 ---------- $ 6,088 ---------- ---------- >>Quarterly VariabilityFluctuations in quarterly results are due to a number of factors, some of which are not within the Company's control such as seasonality and commodity prices. << - Seasonality of winter operating conditions combined with the timing of transfer of wells from Albpetrol results in production increases that are typically higher in the second and third quarters. As new wells come on stream, there is a build-up period in production, higher sand production and higher well servicing costs, which is typical for heavy oil wells in the first year of production. In addition, production levels can be affected by water disposal constraints, mechanical wellbore and isolation failures, increased water production coming from shallower and deeper zones, and a shortage of rig work-over capacity and specialised well servicing equipment. - The increase in royalties is related to higher oil prices and the greater number of wells being taken over from Albpetrol, which results in higher pre-existing production. - Fluctuations of operating expenses is part of a continuing trend that results from operating efficiencies gained through greater experience in field operations and economies of scale as the proportionate share of fixed operating expenses declines with production increases. >>CRITICAL ACCOUNTING ESTIMATESThe Company's financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). Significant accounting policies are disclosed in Note 2 to the Audited Consolidated Financial Statements. Preparation of financial statements in accordance with GAAP requires that management make estimates that affect the reported amount of assets, liabilities, revenues and expenses. The estimates used in applying these critical accounting policies are as follows:Capitalized CostsThe Company follows the full cost method of accounting for its oil properties whereby all costs associated with the exploration for and development of oil reserves are capitalized on a cost centre (country) basis. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells, production equipment, overhead charges directly related to acquisition, exploration and development activities and asset retirement costs.Depletion and DepreciationCapitalized costs within each cost centre are depleted and depreciated on the unit-of-production method based on the estimated gross proved reserves determined by independent petroleum engineers. Depletion and depreciation is calculated using the capitalized costs, plus the estimated future costs to be incurred in developing proved reserves, net of estimated salvage value. Costs of acquiring and evaluating unproved properties are initially excluded from the depletion and depreciation calculation until it is determined whether or not proved reserves can be assigned to such properties.Proceeds from the sale of oil properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would alter the rate of depletion and depreciation by more than 20 percent in a particular country cost centre, in which case a gain or loss on disposal is recorded.Equipment, furniture and fixtures are depreciated on the declining balance method at rates of 20 to 30 percent.Income TaxesFuture income taxes are recorded using the asset and liability method. Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that substantive enactment or enactment occurs. To the extent that the Company does not consider it more likely than not that a future tax asset will be recovered, it provides a valuation allowance against the excess.Ceiling TestIn accordance with the full cost accounting guideline, the Company evaluates its oil and gas assets to determine that the costs are recoverable and do not exceed the fair value of the properties. The costs are assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved reserves and the lower of cost and market of unproved properties exceed the carrying value of the oil and gas assets. If the carrying value of the oil and gas assets is not assessed to be recoverable, an impairment loss is recognized to the extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of proved plus probable reserves and the lower of cost and market of unproved properties. The cash flows are estimated using the future product prices and costs and are discounted using the risk-free rate.Asset Retirement ObligationsThe fair value of estimated asset retirement obligations is capitalized to property, plant and equipment in the period in which the liability is incurred. Asset retirement obligations include those legal obligations where the Company will be required to retire tangible long-lived assets such as producing well sites and facilities. Asset retirement costs for oil properties are amortized as part of depletion and depreciation using the unit-of-production method.Increases in asset retirement obligations resulting from the passage of time are recorded as accretion expense. Actual abandonment expenditures incurred are charged against the accumulated obligation.Stock-based compensationCompensation costs attributable to all stock options granted to employees, directors and service providers are measured at fair value at the date of grant using the Black-Scholes option pricing model and expensed over the vesting period with a corresponding increase to contributed surplus. Upon exercise of options, consideration received, together with the amount previously recognized in contributed surplus, is recorded as an increase to share capital.RELATED PARTY TRANSACTIONSThe Company had a note receivable from BKX in an amount of $2.7 million as at December 31, 2009. The full amount was received during the year ended December 31, 2010. BKX is considered a related party as BKX and the Company have common directors. The above transaction was considered to be in the normal course of business.SUBSEQUENT EVENTIn February 2011, the Company entered into financial commodity put contracts representing 4,000 barrels of oil per day at a floor price of $80 per barrel for the period January 1, 2012 to December 31, 2012.NEW ACCOUNTING STANDARDSTransition to International Financial Reporting Standards (IFRS)Commencing on January 1, 2011 International Financial Reporting Standards (IFRS) are the generally accepted accounting principles in Canada. The changeover date of January 1, 2011 requires the restatement, for comparative purposes, of amounts reported by Bankers for the year ended December 31, 2010, including the opening balance sheet as at January 1, 2010. The project to convert to IFRS is being managed by members of the finance and accounting group, who have engaged in IFRS educational programs and continue to develop the Company's adoption to IFRS. The Company's auditors have been and will continue to be involved throughout the process to ensure the Company's policies are in accordance with these new standards.In July 2009, an amendment to IFRS 1 First Time Adoption of International Reporting Standards was issued that applies to oil and gas assets. The amendment allows an entity that used full cost accounting under its current Canadian GAAP to elect, at its time of adoption, to measure exploration and evaluation assets at the amount determined under the entity's current Canadian GAAP and to measure oil and gas assets in the development and production phases by allocating the amount determined under the entity's current Canadian GAAP for those assets to the underlying assets pro rata using reserve volumes or reserve values as of that date. Bankers will use this exemption. IFRS 1 also provides a number of other optional exemptions and mandatory exceptions in certain areas to the general requirement for full retrospective application which are: << - Business Combinations - IFRS 1 would allow the Company to use the IFRS rules for business combinations on a prospective. The Company plans to use this exemption. - Share-based payments - IFRS 1 allows the Company an exemption on IFRS 2, "Share-Based Payments" to equity instruments which vested before Bankers' transition date to IFRS. The Company will use this exemption. >>The transition from Canadian GAAP to IFRS is significant and may materially affect the Company's reported financial position and results of operations. Key differences identified by the Company that will impact the financial statements and the current status of those items are noted: << - Property, plant and equipment (PP&E) - This includes oil and gas assets in the development and production phases. As all oil and gas assets of the Company are in the development and production phases, the full amount will be included in PP&E and allocated to two cash generating units (CGUs). - Impairment of PP&E assets - Under IFRS, impairment tests of PP&E must be performed at the CGU level as opposed to the entire PP&E balance which is required under current Canadian GAAP through the full cost ceiling test. Impairment calculations are required to be performed using fair values of the PP&E assets and the Company will use the discounted proved plus probable reserve values for impairment tests of PP&E. The Company does not anticipate its PP&E assets to be impaired as at January 1, 2010 under IFRS. - Depletion expense - On transition to IFRS, the Company has the option to use either proved reserves or proved plus probable reserves in the depletion calculation. The Company will use proved plus probable reserves in determining depletion expense. - Share based payments - The major difference between current Canadian GAAP and IFRS that impacts the Company is the use of an estimated forfeiture rate at grant date as opposed to recognizing the impact of forfeitures when they occur. The Company will apply a forfeiture rate of 5% to all unvested stock options at transition and the impact of this is not expected to be material. - Provisions - The major difference between the current Canadian standard and IFRS is the discount rate used to measure the asset retirement obligation (ARO). Under the current Canadian standard, a credit adjusted risk free rate is used, whereby the IFRS allows the use of a risk free rate when the expected cash flows are risked. There was debate within the industry on the discount rate and whether there should be a risk component to it. Based on recent comments made by the standard setters and positions within the industry, Bankers believes a risk free rate is more appropriate. A lower discount rate will increase the ARO liability and on transition to IFRS, the corresponding impact will be charged to retained earnings or deficit. >>In addition to the accounting policy differences, the Company's transition to IFRS will impact the internal controls over financial reporting, the disclosure controls and procedures and information technology (IT) systems as follows: << - Internal controls over financial reporting - Based on the Company's accounting policies under IFRS, the Company has assessed whether additional controls or changes in procedures are required. Bankers does not consider these changes to be significant. - Disclosure controls and procedures - Throughout the transition process, the Company will be assessing stakeholder's information requirements and will ensure that adequate and timely information is provided while ensuring the Company maintains its due process regarding information that is disclosed. - IT Systems - The Company has assessed the readiness of its accounting software and has and continues to assess other system requirements that may be needed in order to perform ongoing calculations and analysis under IFRS. These changes are not considered to be significant. >>Management is continuing to finalize its accounting policies and choices and is continuing with its due process in regards to information that is disclosed. As such, the Company is currently unable to quantify the full impact on the financial statements of adopting IFRS. However, the Company has disclosed certain expectations above based on information known to date. Due to anticipated changes to IFRS and International Accounting Standards prior to the Company's adoption of IFRS, certain items may be subject to change based on new facts and circumstances that arise after the date of this MD&A.INTERNAL CONTROLSThe Company's President and Chief Executive Officer (CEO) and Executive Vice President, Finance and Chief Financial Officer (CFO) are responsible for establishing and maintaining disclosure controls and procedures and internal controls over financial reporting as defined in NI 52-109.Disclosure controls and procedures have been designed to ensure that information to be disclosed by the Company is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure. The Company's CEO and CFO have evaluated the effectiveness of the disclosure controls and procedures as at December 31, 2010 and have concluded that they are operating effectively to provide reasonable assurance that all material information relating to the Company is disclosed in a timely manner.Internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of the Company's financial reporting and compliance with generally accepted accounting principles. The CEO and CFO have evaluated the Company's internal controls over financial reporting as at December 31, 2010 based on the framework in "Internal Control Over Financial Reporting - Guidance for Smaller Public Companies" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and have concluded they are designed and operating effectively to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with GAAP. During 2010, there have been no changes to the Company's internal controls over financial reporting that have materially, or are reasonably likely to, materially affect the internal controls over financial reporting.Because of their inherent limitations, disclosure controls and procedures and internal controls over financial reporting may not prevent or detect misstatements, errors or fraud. Control systems, no matter how well conceived or operated, can provide only reasonable, not absolute assurance that the objectives of the control systems are met.OUTLOOKFor 2011, our continued focus is to increase reserves, production and maximize cash flow from operations. To achieve this, the Company will implement the following: << - Drill 66 horizontal and vertical wells and complete 120 well reactivations and workovers at the Patos-Marinza oilfield. A fourth drilling rig is expected in the second quarter. - Increase production facilities to handle our target exit production rate of 20,000 bopd. - 2011 will be a milestone year for thermal development of the Patos-Marinza oilfield. Bankers will drill a vertical delineation well and two horizontal wells designed for high pressure and temperature steam injection, install a 25,000 BTU steam generator and all associated production facilities. - Complete Phase 1 (10 kilometres) of the 40 kilometre pipeline to Vlore and construction of the receiving hub in Fier. - Continue with the environmental stewardship and social initiatives in our area of operations. - Bankers is building a larger team of senior professionals to complement its existing team of engineers, geoscientists, production and support staff to manage another record capital program in 2011, currently budgeted at $215 million. BANKERS PETROLEUM LTD. CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31 (Expressed in thousands of US dollars) ------------------------------------------------------------------------- ASSETS 2010 2009 ------------------------- Current assets Cash and cash equivalents (Note 12) $ 106,619 $ 59,495 Short-term deposits - 7,275 Restricted cash 1,500 1,500 Accounts receivable 29,233 23,358 Inventory 4,199 2,031 Deposits and prepaid expenses 16,624 5,899 ------------------------- 158,175 99,558 Note receivable (Note 4) - 2,749 Deferred financing costs (Note 6(e)) 11,805 14,383 Property, plant and equipment (Note 5) 297,434 188,130 ------------------------- $ 467,414 $ 304,820 ------------------------- ------------------------- LIABILITIES Current liabilities Accounts payable and accrued liabilities $ 23,241 $ 19,505 Current portion of long-term debt (Note 6) 4,014 4,639 ------------------------- 27,255 24,144 Long-term debt (Note 6) 21,815 23,446 Asset retirement obligations (Note 7) 5,496 3,856 Future income tax liability (Note 10) 69,541 39,414 SHAREHOLDERS' EQUITY Share capital (Note 8(a)) 309,379 206,058 Warrants (Note 8(b)) 1,597 1,739 Contributed surplus (Note 8(e)) 28,715 16,812 Retained earnings (deficit) 3,616 (10,649) ------------------------- 343,307 213,960 ------------------------- $ 467,414 $ 304,820 ------------------------- ------------------------- Commitments (Note 11) Subsequent event (Note 14) See accompanying notes to consolidated financial statements. APPROVED BY THE BOARD "Robert Cross" Director "Eric Brown" Director -------------------- -------------------- BANKERS PETROLEUM LTD. CONSOLIDATED STATEMENT OF OPERATIONS, COMPREHENSIVE INCOME (LOSS) AND RETAINED EARNINGS (DEFICIT) FOR THE YEARS ENDED DECEMBER 31 (Expressed in thousands of US dollars, except per share amounts) ------------------------------------------------------------------------- 2010 2009 ------------------------- Revenue Oil revenue $ 170,376 $ 86,614 Royalties (33,682) (20,468) Interest 732 824 ------------------------- 137,426 66,970 ------------------------- Expenses Operating 36,744 24,781 Sales and transportation 18,847 9,869 General and administrative 8,255 6,450 Interest and bank charges 1,160 648 Interest on long-term debt 1,421 1,858 Gain on disposal of investments - (347) Foreign exchange gain (5,225) (4,586) Stock-based compensation (Note 8(d)) 8,111 4,545 Amortization of deferred financing costs (Note 6(e)) 2,789 1,803 Depletion, depreciation and accretion 27,516 16,208 ------------------------- 99,618 61,229 ------------------------- Income before income tax 37,808 5,741 Future income tax expense (Note 10) (23,543) (5,891) ------------------------- Net income (loss) and comprehensive income (loss) for the year 14,265 (150) Deficit, beginning of year (10,649) (10,499) ------------------------- Retained earnings (deficit), end of year $ 3,616 $ (10,649) ------------------------- ------------------------- Basic earnings (loss) per share $ 0.060 $ (0.001) ------------------------- ------------------------- Diluted earnings (loss) per share $ 0.058 $ (0.001) ------------------------- ------------------------- See accompanying notes to consolidated financial statements. BANKERS PETROLEUM LTD. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31 (Expressed in thousands of US dollars) ------------------------------------------------------------------------- 2010 2009 ------------------------- Cash provided by (used in): Operating activities Net income (loss) for the year $ 14,265 $ (150) Items not involving cash: Depletion, depreciation and accretion 27,516 16,208 Amortization of deferred financing costs 2,789 1,803 Future income tax expense 23,543 5,891 Stock-based compensation 8,111 4,545 Unrealized foreign exchange gain (3,058) (2,528) Gain on disposal of investments - (347) ------------------------- 73,166 25,422 Change in non-cash working capital (Note 12) (21,714) (14,491) ------------------------- 51,452 10,931 ------------------------- Investing activities Additions to property, plant and equipment (122,012) (38,324) Proceeds from disposal of investments - 481 Change in non-cash working capital (Note 12) 6,682 (3,670) ------------------------- (115,330) (41,513) ------------------------- Financing activities Issue of shares for cash 104,720 70,276 Share issue costs (4,333) (2,220) Note receivable 2,749 10,251 Short-term deposits 7,275 (4,275) Financing costs (211) (2,050) Decrease in long-term debt (2,256) (40) ------------------------- 107,944 71,942 ------------------------- Foreign exchange gain on cash and cash equivalents 3,058 2,528 ------------------------- Increase in cash and cash equivalents 47,124 43,888 Cash and cash equivalents, beginning of year 59,495 15,607 ------------------------- Cash and cash equivalents, end of year (Note 12) $ 106,619 $ 59,495 ------------------------- ------------------------- See accompanying notes to consolidated financial statements. Notes to Consolidated Financial Statements (Expressed in U.S. dollars) December 31, 2010 and 2009 ------------------------------------------------------------------------- 1. NATURE OF OPERATIONS Bankers Petroleum Ltd. (the Company) is engaged in the exploration for and development and production of oil in Albania. The Company is listed on the Toronto Stock Exchange and the Alternative Investment Market (AIM) of the London Stock Exchange under the symbol BNK. The Company operates in the Albanian oilfields pursuant to petroleum agreements with Albpetrol Sh.A (Albpetrol), the state owned oil company, under Albpetrol's existing license with the Albanian National Agency for Natural Resources (AKBN). The Patos-Marinza agreement and Kuçova agreement became effective in March 2006 and September 2007, respectively, and have a 25 year term with an option to extend at the Company's election for further five year increments. 2. SIGNIFICANT ACCOUNTING POLICIES These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. The principal accounting policies are outlined below: (a) Basis of consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries - Bankers Petroleum International Ltd., Bankers Petroleum Albania Ltd. (BPAL) and Sherwood International Petroleum Ltd. (b) Financial instruments All financial instruments including all derivatives are recognized on the balance sheet initially at fair value. Subsequent measurement of all financial assets and liabilities except those held-for-trading and available-for-sale are measured at amortized cost determined using the effective interest rate method. Held-for-trading financial assets are measured at fair value with changes in fair value recognized in earnings. Available-for-sale financial assets are measured at fair value with changes in fair value recognized in comprehensive income and reclassified to earnings when impaired. Cash and cash equivalents and short-term deposits are held-for-trading instruments and the fair values approximate their carrying amount due to their short-term nature. Accounts receivable is classified as loans and receivables and the fair value approximates their carrying value due to the short-term nature of these instruments. The note receivable is classified as other financial assets and its fair value approximates the carrying value as it bears interest at market rate. The accounts payable and accrued liabilities are classified as other financial liabilities and the fair value approximates their carrying value due to the short-term nature of these instruments. The operating and term loans are classified as other financial liabilities and their fair value approximates their carrying value, as they bear interest at market rates. Transaction costs are frequently attributed to the issue of a financial asset or liability. The Company has selected a policy of netting all transaction costs with the related financial assets and liabilities. The Company may use derivative financial instruments from time to time to hedge its exposure to commodity price fluctuations. The Company recognizes the fair value of the derivative financial instruments on the balance sheet each reporting period. Unrealized gains and losses resulting from changes in the fair value of these instruments are recognized in net income at the end of each reporting period and realized gains and losses are recorded when the instrument is settled. The derivative financial instruments are initiated within the guidelines of the Company's risk management policy and the Company does not enter into derivative financial instruments for trading or speculative purposes. (c) Foreign currency translation The Company and its wholly-owned subsidiaries have a United States (US) dollar functional currency. Transactions denominated in foreign currencies are translated into US dollar equivalents at exchange rates approximating those in effect at the transaction dates. Foreign currency denominated monetary assets and liabilities are translated at the year-end exchange rate. Gains and losses arising from foreign currency translation are recognized in the statement of operations. (d) Use of estimates Timely preparation of the financial statements in conformity with Canadian generally accepted accounting principles requires that management make estimates and assumptions and use judgment regarding assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, actual results may differ from estimated amounts as future confirming events occur. In particular, the amounts recorded for depreciation and depletion of oil and natural gas properties and equipment, the provision for asset retirement obligations, the provision for future income taxes and stock based compensation are based on estimates. The ceiling test is based on estimates of proved reserves, production rates, future commodity prices and future costs and other relevant assumptions. (e) Revenue recognition Revenue associated with the sales of the Company's oil is recognized in income when title and risk pass to the buyer, collection is reasonably assured and the price is determinable. (f) Income taxes Future income taxes are recorded using the asset and liability method. Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that substantive enactment or enactment occurs. To the extent that the Company does not consider it more likely than not that a future tax asset will be recovered, it provides a valuation allowance against the excess. (g) Per share amounts Basic earnings (loss) per share is calculated using the weighted-average number of common shares outstanding during the year. The Company uses the treasury stock method to compute the dilutive effect of options, warrants and similar instruments. Under this method, the dilutive effect on earnings per share is recognized on the use of the proceeds that could be obtained upon exercise of options, warrants and similar instruments. It assumes that the proceeds would be used to purchase common shares at the average market price during the period. (h) Cash and cash equivalents Cash and cash equivalents include cash and highly liquid investments with original maturities of three months or less. (i) Inventory Inventory comprises of crude oil, solar and diesel stock. Inventory is valued at the lower of average cost of production and net realizable value. (j) Property, plant and equipment Capitalized costs ----------------- The Company follows the full cost method of accounting for its oil properties whereby all costs associated with the exploration for and development of oil reserves are capitalized on a cost centre (country) basis. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells, production equipment, overhead charges directly related to acquisition, exploration and development activities and asset retirement costs. Depletion and depreciation -------------------------- Capitalized costs within each cost centre are depleted and depreciated on the unit-of-production method based on the estimated gross proved reserves determined by independent petroleum engineers. Depletion and depreciation is calculated using the capitalized costs, plus the estimated future costs to be incurred in developing proved reserves, net of estimated salvage value. Costs of acquiring and evaluating unproved properties are initially excluded from the depletion and depreciation calculation until it is determined whether or not proved reserves can be assigned to such properties. Proceeds from the sale of oil properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would alter the rate of depletion and depreciation by more than 20 percent in a particular country cost centre, in which case a gain or loss on disposal is recorded. Equipment, furniture and fixtures are depreciated on the declining balance method at rates of 20 to 30 percent. Ceiling test ------------ In accordance with the full cost accounting guideline, the Company evaluates its oil and gas assets to determine that the costs are recoverable and do not exceed the fair value of the properties. The costs are assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved reserves and the lower of cost and market of unproved properties exceed the carrying value of the oil and gas assets. If the carrying value of the oil and gas assets is not assessed to be recoverable, an impairment loss is recognized to the extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of proved plus probable reserves and the lower of cost and market of unproved properties. The cash flows are estimated using the future product prices and costs and are discounted using the risk-free rate. Asset retirement obligations ---------------------------- The fair value of estimated asset retirement obligations is capitalized to property, plant and equipment in the period in which the liability is incurred. Asset retirement obligations include those legal obligations where the Company will be required to retire tangible long-lived assets such as producing well sites and facilities. Asset retirement costs for oil properties are amortized as part of depletion and depreciation using the unit-of-production method. Increases in asset retirement obligations resulting from the passage of time are recorded as accretion expense. Actual abandonment expenditures incurred are charged against the accumulated obligation. (k) Stock-based compensation Compensation costs attributable to all stock options granted to employees, directors and service providers are measured at fair value at the date of grant using the Black-Scholes option pricing model and expensed over the vesting period with a corresponding increase to contributed surplus. Upon exercise of options, consideration received, together with the amount previously recognized in contributed surplus, is recorded as an increase to share capital. (l) Comparative figures Certain prior year figures have been re-classified to conform to the current year's presentation. 3. FUTURE ACCOUNTING CHANGES International Financial Reporting Standards ("IFRS") On January 1, 2011 International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) will become the generally accepted accounting principles in Canada. The adoption date of January 1, 2011 will require the restatement, for comparative purposes, of amounts reported by Bankers for the year ended December 31, 2010, including the opening balance sheet as at January 1, 2010. Bankers will release its first IFRS compliant interim financial statements for the first quarter of 2011. 4. NOTE RECEIVABLE The note receivable of nil (2009 - $2.7 million) represents the residual amount due from BNK Petroleum Inc. (BKX). BKX is considered a related party as BKX and the Company have common directors. The above transaction is considered to be in the normal course of business and has been measured at the exchange amount being the amounts agreed to by both the parties. The full amount outstanding at December 31, 2009 was received during the year ended December 31, 2010. 5. PROPERTY, PLANT AND EQUIPMENT The following table summarizes the Company's property, plant and equipment as at December 31: 2010 --------------------------------------------------------------------- Accumulated Depletion and Deprec- Net ($000s) Cost iation Book Value --------------------------------------------------------------------- Oil properties $ 363,864 $ 69,741 $ 294,123 Equipment, furniture and fixtures 5,591 2,280 3,311 --------------------------------------- $ 369,455 $ 72,021 $ 297,434 --------------------------------------- --------------------------------------- 2009 --------------------------------------------------------------------- Accumulated Depletion and Deprec- Net ($000s) Cost iation Book Value --------------------------------------------------------------------- Oil properties $ 229,230 $ 43,217 $ 186,013 Equipment, furniture and fixtures 3,830 1,713 2,117 --------------------------------------- $ 233,060 $ 44,930 $ 188,130 --------------------------------------- --------------------------------------- Depletion for the year ended December 31, 2010 included $956.5 million (2009 - $382.0 million) for estimated future development costs associated with proved reserves in Albania. The Company capitalized general and administrative expenses and stock-based compensation of $10.1 million (2009 - $3.9 million) that were directly related to exploration and development activities in Albania. The Company's ceiling test calculation for the Albania cost centre, as at December 31, 2010, resulted in no impairment loss. The future prices used by the Company in estimating cash flows were based on forecasts by independent reserves evaluators, adjusted for the Company's quality and transportation differentials. The following table summarizes the benchmark prices used in the calculation: --------------------------------------------------------------------- Brent Price Year (US$/barrel) --------------------------------------------------------------------- 2011 90.00 2012 89.50 2013 89.10 2014 89.25 2015 91.00 Average annual increase, thereafter 2% --------------------------------------------------------------------- --------------------------------------------------------------------- The Company has secured $1.5 million (2009 - $1.5 million) for certain capital projects in the Kucova oilfield. These projects are expected to be completed in 2011. At December 31, 2010, approximately $1.0 million of expenditures have been incurred towards this commitment. 6. LONG-TERM DEBT The Company has credit facilities with three international banks, including Raiffeisen Bank, the European Bank for Reconstruction and Development (EBRD) and the International Finance Corporation (IFC), as summarized below: Facility ($000s) Amount Outstanding Amount --------------------------------------------------------------------- December 31, December 31, 2010 2009 -------------------------- Raiffeisen Bank --------------- Operating loan (a) $ 20,000 $ 19,741 $ 17,358 Term loan - 2006 (b) 3,125 3,125 6,875 Term loan - 2009 (c) 2,963 2,963 3,852 EBRD and IFC* --------------- Environmental term loan (d) 10,000 - - Revolving loan - Tranche 1 (e) 50,000 - - Revolving loan - Tranche 2 (e) 50,000 - - --------------------------------------- $ 136,088 $ 25,829 $ 28,085 --------------------------------------- --------------------------------------- * all facilities are equally funded These facilities are secured by all of the assets of BPAL, assignment of proceeds from the Albanian domestic and export crude oil sales contracts, a pledge of the common shares of BPAL and a guarantee by the Company. The credit facilities are subject to certain covenants requiring the maintenance of certain financial ratios, all of which were met as at December 31, 2010 and 2009. (a) Operating loan The operating loan is a revolving facility, has no scheduled repayments until its maturity in March 2012 and bears interest at a rate relative to the bank's refinancing rate plus 3.5%. (b) Term loan - 2006 This term loan bears interest at the bank's refinancing rate plus 4.5% and is repayable in equal monthly instalments of $0.3 million ending on October 31, 2011. As at December 31, 2010, the entire term loan was utilized and has been classified as current. (c) Term loan - 2009 This term loan bears interest at the bank's refinancing rate plus 4.65% and is repayable in equal monthly instalments of $74,100 ending on April 30, 2014. As at December 31, 2010, the entire facility was utilized. Of the amount outstanding, $0.9 million is classified as current and $2.1 million as long-term. Principal repayments of the term loan over the next four years are: ($000s) --------------------------------------------------------------------- 2011 $ 889 2012 889 2013 889 2014 296 -------------- $ 2,963 -------------- -------------- (d) Environmental term loan The $10.0 million term loan, funded equally by IFC and EBRD, is available for environmental and social programs pertinent to the Company's activities in Albania. The interest rate is based on the London Inter-Bank Offer Rate (LIBOR) plus 4.5%. A standby fee of 0.5% is charged on the unutilized portion. At December 31, 2010, none of the facility was drawn. Principal repayments commence in April 2013 in bi-annual instalments of $0.5 million with maturity on October 15, 2017. (e) Revolving loans The revolving loans, funded equally by EBRD and IFC, consist of two $50.0 million tranches, of which Tranche I is currently available to the Company. Tranche II becomes available subject to mutual agreement among the Company, IFC and EBRD, when production exceeds 10,000 barrels of oil per day and the Brent oil price exceeds $62 per barrel for twenty consecutive trading days. The interest rate is based on LIBOR plus 4.5%. A standby fee of 2.0% is charged on the unutilized Tranche I portion and Tranche II portion, when it becomes available. At December 31, 2010, none of the facility was drawn. For each of Tranche I and Tranche II, the amounts decline to $16.5 million on October 15, 2013, $8.3 million on October 14, 2014 with final repayment due on October 15, 2015. Setup costs of $16.4 million (2009 - $16.2 million) pertaining to these facilities, including the value attributed to the share purchase warrants (Note 8(b)), have been recorded as deferred financing costs and are amortized over the life of the revolving facilities. As of December 31, 2010, $4.6 million (2009 - $1.8 million) has been amortized. For the year ended December 31, 2010, $2.8 million (2009 - $1.8 million) has been amortized and charged to earnings. 7. ASSET RETIREMENT OBLIGATIONS In Albania, the Company estimated the total undiscounted amount required to settle the asset retirement obligations at $31.5 million (2009 - $24.7 million). These obligations will be settled at the end of the Company's 25-year license of which 20 years are remaining. The liability has been discounted using a credit-adjusted risk-free interest rate of 10% (2009 - 10%) and an inflation rate of 2.0% (2009 - 2.5%) to arrive at asset retirement obligations of $5.5 million as at December 31, 2010. ($000s) 2010 2009 --------------------------------------------------------------------- Asset retirement obligation, beginning of year $ 3,856 $ 2,896 Incurred 1,311 656 Revision (96) - Accretion 425 304 -------------------------- Asset retirement obligation, end of year $ 5,496 $ 3,856 -------------------------- -------------------------- 8. SHAREHOLDERS' EQUITY (a) Share capital Authorized Unlimited number of common shares with no par value. Issued Number of Amount Common Shares ($000s) --------------------------------------------------------------------- Balance, December 31, 2008 182,540,179 $ 121,907 Prospectus issue 25,143,800 38,349 Warrants exercised 19,144,502 43,731 Stock options exercised 1,443,684 4,291 Share issue costs - (2,220) -------------------------- Balance, December 31, 2009 228,272,165 206,058 Prospectus issue 12,903,228 96,153 Warrants exercised 1,277,267 3,381 Stock options exercised 2,342,330 8,120 Share issue costs - (4,333) -------------------------- Balance, December 31, 2010 244,794,990 $ 309,379 -------------------------- -------------------------- (a) Share capital (cont'd) On July 15, 2010, the Company completed a prospectus offering with a syndicate of underwriters and issued an aggregate of 12,903,228 common shares at a price of CAD$7.75 per common share on a bought deal basis, resulting in gross proceeds of $96.2 million. Commissions and share issue costs were $4.3 million. The following table summarizes the calculation of basic and diluted weighted average number of common shares: 2010 2009 --------------------------------------------------------------------- Weighted-average number of common shares outstanding - basic 236,726,203 206,999,279 Dilutive effect of stock options 6,947,977 - Dilutive effect of warrants 3,294,984 - -------------------------- Weighted-average number of common shares outstanding - diluted 246,969,164 206,999,279 -------------------------- -------------------------- In computing diluted earnings per share for the year ended December 31, 2010, 480,000 (2009 - 4,205,000) options were excluded as the effect would be anti-dilutive. Due to the net loss in 2009, the effect of all options and warrants was anti-dilutive. (b) Warrants A summary of the changes in warrants is presented below: Number of Amount Warrants ($000s) --------------------------------------------------------------------- Balance, December 31, 2008 9,713,375 $ 2,088 Issued 16,000,000 14,136 Transferred to share capital on exercise (19,144,502) (14,485) Forfeited (428,540) - -------------------------- Balance, December 31, 2009 6,140,333 1,739 Transferred to share capital on exercise (1,277,267) (142) -------------------------- Balance, December 31, 2010 4,863,066 $ 1,597 -------------------------- -------------------------- The following table summarizes the outstanding and exercisable warrants at December 31, 2010: --------------------------------------------------------------------- Number of Warrants Weighted Average Exercise Expiry Date Outstanding and Exercisable Price (CAD$) -------------------------------------------------------------------- March 1, 2012 4,863,066 2.37 The Company calculated the fair value of the warrants issued during the year ended December 31, 2009 to be $14.1 million. The Company determined this amount using the Black-Scholes option pricing model assuming a risk free interest rate of 2.1%, a dividend yield of 0%, a forfeiture rate of 0%, an expected volatility of 126% and expected life of the warrants to be one year from the date of grant. The fair value per warrant for this grant was CAD$1.01. No warrants were issued for the year ended December 31, 2010. (c) Stock Options The Company has established a "rolling" Stock Option Plan. The number of shares reserved for issuance may not exceed 10% of the total number of issued and outstanding shares and, to any one optionee, may not exceed 5% of the issued and outstanding shares on a yearly basis or 2% if the optionee is engaged in investor relations activities or is a consultant. The exercise price of each option shall not be less than the market price of the Company's stock at the date of grant. Options issued vest one-third immediately (after three months for new employees) following the date of the grant, one-third after one year following the date of the grant, and one-third two years following the grant date. A summary of the changes in stock options is presented below: Weighted Average Number of Exercise Options Price (CAD$) --------------------------------------------------------------------- Balance, December 31, 2009 12,830,002 2.39 Granted 4,140,000 6.71 Exercised (2,342,330) 2.35 Forfeited (113,168) 4.57 ------------------------------------ Balance, December 31, 2010 14,514,504 3.61 ------------------------------------ ------------------------------------ The following table summarizes the outstanding and exercisable options at December 31: 2010 2009 ----------------------------- ----------------------------- Weighted Weighted Average Average Remaining Remaining Range of Contrac- Contrac- Exercise tual tual Price Out- Exer- Life Out- Exer- Life (CAD$) standing cisable (years) standing cisable (years) ------------------------------------------- ----------------------------- 1.01 - 1.50 2,283,611 2,300,277 2.7 3,144,444 2,210,930 3.7 1.51 - 2.00 4,295,167 3,330,827 2.8 4,577,390 2,557,391 3.8 2.01 - 3.00 627,223 627,223 2.1 903,168 630,939 2.8 3.01 - 3.50 645,999 645,999 0.4 1,300,000 1,300,000 1.1 3.51 - 4.00 58,334 58,334 2.6 150,000 116,666 2.3 4.01 - 4.50 1,775,001 1,775,001 2.3 1,775,000 1,183,331 3.3 4.51 - 5.00 300,000 300,000 2.5 300,000 200,000 3.5 5.01 - 6.00 499,167 310,837 3.9 680,000 226,669 4.9 6.01 - 6.50 2,840,002 919,992 4.0 - - - 6.51 - 7.00 550,000 183,336 4.8 - - - 7.01 - 7.50 160,000 53,333 4.6 - - - 7.51 - 9.50 480,000 159,994 4.2 - - - ---------------------- ---------------------- 14,514,504 10,665,153 12,830,002 8,425,926 ---------------------- ---------------------- ---------------------- ---------------------- (d) Stock-based Compensation Using the fair value method for stock-based compensation, the Company calculated stock-based compensation expense for the year ended December 31, 2010 as $14.7 million (2009 - $6.5 million) for the stock options granted to officers, directors, employees and service providers. Of this amount, $8.1 million (2009 - $4.5 million) was charged to earnings and $6.6 million (2009 - $2.0 million) was capitalized. The Company determined these amounts using the Black- Scholes option pricing model assuming a risk free interest rate range of 1.91% - 2.86% (2009 - 1.80% to 2.59%), a dividend yield of 0% (2009 - 0%), a forfeiture rate of 0% (2009 - 0%), an expected volatility range of 49% - 77% (2009 - 103% to 126%) and expected lives of the stock options of five years (2009 - five) from the date of grant. The weighted average fair value per option granted during the year was CAD$3.96 (2009 - CAD$1.99). (e) Contributed Surplus The following table summarizes the change in contributed surplus as of December 31: ($000s) 2010 2009 --------------------------------------------------------------------- Balance, beginning of year $ 16,812 $ 11,862 Stock-based compensation 14,695 6,560 Transferred to share capital on exercise (2,792) (1,610) -------------------------- Balance, end of year $ 28,715 $ 16,812 -------------------------- -------------------------- 9. SEGMENTED INFORMATION The Company defines its reportable segments based on geographic locations. Year ended December 31, 2010 ($000s) Albania Canada Total --------------------------------------------------------------------- Revenue Oil revenue $ 170,376 $ - $ 170,376 Royalties (33,682) - (33,682) Interest 9 723 732 --------------------------------------- 136,703 723 137,426 --------------------------------------- Expenses Operating 36,744 - 36,744 Sales and transportation 18,847 - 18,847 General and administrative 3,725 4,530 8,255 Interest and bank charges 1,160 - 1,160 Interest on long-term debt 1,421 - 1,421 Foreign exchange gain (178) (5,047) (5,225) Stock-based compensation 2,348 5,763 8,111 Amortization of deferred financing costs 2,789 - 2,789 Depletion, depreciation and accretion 27,357 159 27,516 --------------------------------------- 94,213 5,405 99,618 --------------------------------------- Income (loss) before income taxes 42,490 (4,682) 37,808 Future income tax expense (23,543) - (23,543) --------------------------------------- Net income (loss) for the year $ 18,947 (4,682) $ 14,265 --------------------------------------- --------------------------------------- Assets, December 31, 2010 $ 360,226 $ 107,188 $ 467,414 --------------------------------------- --------------------------------------- Additions to property, plant and equipment $ 121,852 $ 160 $ 122,012 --------------------------------------- --------------------------------------- During the year, the Albania segment recorded domestic sales of $24.8 million (2009 - $15.5 million) and export sales of $145.6 million (2009 - $71.1 million). Year ended December 31, 2009 ($000s) Albania Canada Total --------------------------------------------------------------------- Revenue Oil revenue $ 86,614 $ - $ 86,614 Royalties (20,468) - (20,468) Interest 1 823 824 --------------------------------------- 66,147 823 66,970 --------------------------------------- Expenses Operating 24,781 - 24,781 Sales and transportation 9,869 - 9,869 General and administrative 3,055 3,395 6,450 Interest and bank charges 648 - 648 Interest on long-term debt 1,858 - 1,858 Gain on disposal of investments - (347) (347) Foreign exchange gain (5) (4,581) (4,586) Stock-based compensation 831 3,714 4,545 Amortization of deferred financing costs 1,803 - 1,803 Depletion, depreciation and accretion 16,083 125 16,208 --------------------------------------- 58,923 2,306 61,229 --------------------------------------- Income (loss) before income taxes 7,224 (1,483) 5,741 Future income tax expense (5,891) - (5,891) --------------------------------------- Net income (loss) for the year $ 1,333 $ (1,483) $ (150) --------------------------------------- --------------------------------------- Assets, December 31, 2009 $ 221,503 $ 83,317 $ 304,820 --------------------------------------- --------------------------------------- Additions to property, plant and equipment $ 38,190 $ 134 $ 38,324 --------------------------------------- --------------------------------------- 10. INCOME TAXES Future income tax expense relates to the Albanian operations and results from the following as of December 31: ($000s) 2010 2009 --------------------------------------------------------------------- Net book value of property, plant and equipment, net of asset retirement obligations $ 291,681 $ 180,280 Cost recovery pool (152,599) (101,452) -------------------------- Timing difference $ 139,082 $ 78,828 -------------------------- -------------------------- Future income tax liability at 50% $ 69,541 $ 39,414 -------------------------- -------------------------- The Company's future income tax liabilities result from the temporary differences between the carrying value and tax values of its Albanian assets and liabilities. The cost recovery pool represents deductions for income taxes in Albania. Under the terms of the petroleum agreements in Albania, any profit will be taxed at a rate of 50 percent. The provision for income taxes reported differs from the amounts computed by applying the cumulative Canadian federal and provincial income tax rates to the income before tax provision due to the following: ($000s) 2010 2009 --------------------------------------------------------------------- Income before income taxes $ 37,808 $ 5,741 Statutory tax rate 28.00% 29.00% -------------------------- 10,586 1,665 Difference in tax rates between Albania and Canada 9,348 2,453 Non-deductible expenses 2,271 595 Valuation allowance 3,451 2,190 Other (2,113) (1,012) -------------------------- Future income tax expense $ 23,543 $ 5,891 -------------------------- -------------------------- The significant components of the Company's future income tax assets and liabilities are as follows: ($000s) 2010 2009 --------------------------------------------------------------------- Future income tax assets Non-capital loss carry forwards $ 6,847 $ 4,456 Capital loss 2,148 1,124 Share issue costs 882 392 Property, plant and equipment 178 (771) Less: valuation allowances (10,055) (5,201) -------------------------- Future income tax assets $ - $ - -------------------------- -------------------------- Future income tax liabilities Property, plant and equipment - Albania $ 69,541 $ 39,414 -------------------------- Future income tax liability $ 69,541 $ 39,414 -------------------------- -------------------------- The Company has available for deduction against future Canadian taxable income, non-capital losses of approximately $27.4 million. These losses, if not utilized, will expire commencing in 2011 as follows: ($000s) --------------------------------------------------------------------- 2011 $ 1,552 2015 4,166 2026 2,310 2027 5,846 2028 193 2029 5,786 2030 7,534 ------------- $ 27,387 ------------- ------------- The potential income tax benefits of these future income tax assets have been offset by a valuation allowance and have not been recorded in these financial statements. 11. COMMITMENTS The Company leases office premises, of which the minimum lease payments for the next five years are: ($000s) Albania Canada Total --------------------------------------------------------------------- 2011 $ 557 $ 709 $ 1,266 2012 425 541 966 2013 318 528 846 2014 318 44 362 2015 318 - 318 --------------------------------------- $ 1,936 $ 1,822 $ 3,758 --------------------------------------- --------------------------------------- The Company has debt repayment commitments as disclosed in note 6(a), 6(b) and 6(c). 12. SUPPLEMENTAL CASH FLOW INFORMATION ($000s) 2010 2009 --------------------------------------------------------------------- Operating activities Increase in current assets Accounts receivable $ (5,875) $ (5,767) Inventory (2,168) (443) Deposits and prepaid expenses (10,725) (4,668) Decrease in current liabilities Accounts payable and accrued liabilities (2,946) (3,613) -------------------------- $ (21,714) $ (14,491) -------------------------- -------------------------- Investing activities Increase (decrease) in current liabilities Accounts payable and accrued liabilities $ 6,682 $ (3,670) -------------------------- -------------------------- Cash and cash equivalents Cash $ 862 $ 3,895 Fixed income investments 105,757 55,600 -------------------------- $ 106,619 $ 59,495 -------------------------- -------------------------- Interest paid $ 2,581 $ 2,506 -------------------------- -------------------------- Interest received $ 787 $ 1,210 -------------------------- -------------------------- 13. FINANCIAL INSTRUMENTS Financial risk management Overview The Company has exposure to credit, liquidity and market risk. This note presents information about the Company's exposure to each risk, the Company's objectives, policies and processes for measuring and managing risk, and management of capital. The Board of Directors of the Company has the overall responsibility for the establishment and oversight of the Company's risk management framework. The Board has implemented and monitors compliance with risk management policies. The Company's risk management policies are established to identify and analyze the risks faced, to set appropriate risk limits and controls, and to monitor risks and adherence to market conditions and the Company's activities. Fair value measurement The Company's financial instruments recognized on the balance sheet consist of short-term deposits, accounts receivable, note receivable, accounts payable and accrued liabilities and long-term debt. The fair value of these instruments approximate their carrying amounts due to their short terms to maturity or the indexed rate of interest on the note receivable and long-term debt. Bankers' cash and cash equivalents and short-term deposits are transacted in active markets. The Company classifies the fair value of these transactions according to the following hierarchy based on the amount of observable inputs used to value the instrument. Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 2 - Pricing inputs are other than quoted prices in active markets included in Level 1. Prices in Level 2 are either directly or indirectly observable as of the reporting date. Level 2 valuations are based on inputs, including quoted forward prices for commodities, time value and volatility factors, which can be substantially observed or corroborated in the marketplace. Level 3 - Valuations in this level are those with inputs for the asset or liability that are not based on observable market data. The Company's cash and cash equivalents and short-term deposits have been assessed on the fair value hierarchy described above and have been classified as Level 1. Credit risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's receivables from petroleum refineries relating to accounts receivable. As at December 31, 2010, the Company's receivables consisted of $29.0 million (2009 - $23.1 million) of receivables from petroleum refineries and $0.2 million (2009 - $0.2 million) of other trade receivables, as summarized below: 30 - 60 61 - 90 Over 90 ($000s) Current days days days Total --------------------------------------------------------------------- Albania $25,590 $ 3,019 $ 408 $ - $29,017 Canada 216 - - - 216 ----------------------------------------------------- $25,806 $ 3,019 $ 408 $ - $29,233 ----------------------------------------------------- ----------------------------------------------------- In Albania, the Company considers any amounts greater than 60 days as past due. The accounts receivable, included in the table, past due or not past due are not impaired. They are from counterparties with whom the Company has a history of timely collection and the Company considers the accounts receivable collectible. Domestic receivables are due by the end of the month following production and export receivables are collected within 30 days from the date of the shipment. The Company's policy to mitigate credit risk associated with these balances is to establish marketing relationships with a variety of purchasers. The amount past due has been received subsequent to year end and is not considered to be impaired. In Canada, no significant amounts are considered past due or impaired. The carrying amount of accounts receivable represents the maximum credit exposure. As of December 31, 2010 and December 31, 2009, the Company does not have an allowance for doubtful accounts and did not provide for any doubtful accounts nor was it required to write-off any receivables. Cash and cash equivalents consist of cash and bank balances. The Company manages the credit exposure related to short-term investments by selecting counter parties based on credit ratings and monitors all investments to ensure a stable return, avoiding complex investment vehicles with higher risk such as asset backed commercial paper. Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they are due. The Company's approach to managing liquidity is to plan that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions without incurring unacceptable losses or risking harm to the Company's reputation. The timing of cash flows relating to financial liabilities as at December 31, 2010, is as follows: ($000s) 2011 2012 2013 2014 --------------------------------------------------------------------- Accounts payable and accrued liabilities $23,241 $ - $ - $ - Operating loan - 19,741 - - Term loans 4,014 889 889 296 --------------------------------------- Total $27,255 $20,630 $ 889 $ 296 --------------------------------------- --------------------------------------- The Company prepares annual capital expenditure budgets, which are regularly monitored and modified as considered necessary. Further, the Company utilizes authorizations for expenditures on both operated and non-operated projects to further manage capital expenditures. To facilitate the capital expenditure program, the Company has a revolving credit facility with a European financial institution based in Albania, as disclosed in note 6. The Company also attempts to match its payment cycle with its collection of petroleum revenues. The Company maintains a close working relationship with the European bank that provides its credit facility. There were no increases in the existing credit facility during the year. Market Risk Market risk is the risk that changes in market prices, such as foreign exchange rates, commodity prices, and interest rates will affect the Company's net income. The objective of market risk management is to manage and control market risk exposures within acceptable limits, while maximizing returns. Foreign currency exchange rate risk Foreign currency exchange rate risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in foreign exchange rates. As at December 31, 2010, a 10% change in the foreign exchange rate of the Canadian dollar against the United States dollar, with all other variables held constant, would affect after tax net income for the year by $7.0 million (2009 - $3.8 million). The sensitivity is higher in 2010 as compared to 2009 because of an increase in Canadian dollar cash and cash equivalents outstanding. As at December 31, 2010, a 10% change in the foreign exchange rate of the Albanian Lek against the United States dollar, with all other variables held constant, would affect after tax net income for the year by $1,000 (2009 - $2,000). The sensitivity is lower in 2010 compared to 2009 because of a decrease in Albania Lek cash and cash equivalents outstanding. The Company had no forward foreign exchange rate contracts in place as at or during the years ended December 31, 2010 and 2009. Commodity price risk Commodity price risk is the risk that the value of future cash flows will fluctuate as a result of changes in commodity prices. Commodity prices for petroleum and natural gas are impacted by world economic events that dictate the levels of supply and demand. The Company's primary revenues are from heavy oil sales in Albania, priced on a quality differential basis, to the US dollar-based Brent oil price. The Company has not entered into any commodity derivative contracts as at or during the years ended December 31, 2010 and 2009. Interest rate risk Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Company is exposed to interest rate fluctuations on its bank debt which bears a floating rate of interest. As at December 31, 2010, a 10% change in the interest rate, with all other variables held constant, would affect after tax net income for the year by $0.2 million (2009 - $0.3 million). Capital management The Company's policy is to maintain a strong capital base thereby establishing investor, creditor and market confidence and to sustain future business development. The Company manages its capital structure and makes necessary adjustments in light of changes in economic conditions and the risk characteristics of the underlying petroleum and natural gas assets. The Company's capital structure includes shareholders' equity, bank debt and working capital. In order to maintain the capital structure, the Company may from time to time issue shares and adjust capital spending to manage current and projected debt levels. The Company monitors capital based on the ratio of debt to funds from operations. This ratio is calculated as net debt (outstanding bank debt less working capital before debt) divided by funds from operations. The Company's strategy is to maintain a debt to funds from operations ratio of no more than 1.5 to 1. This ratio may increase at certain times as a result of acquisitions. In order to monitor this ratio, the Company prepares annual capital expenditure budgets, which are updated as necessary depending on varying factors including current and forecast prices, successful capital deployment and general industry conditions. The annual and updated budgets are approved by the Board of Directors. As at December 31, 2010, the ratio of surplus in debt to funds from operations was 1.49 (2009 - 2.04). The decrease was primarily due to the increase in funds from operations during the year from $25.4 million in 2009 to $73.2 million in 2010, partially offset by an improvement in net surplus in debt from $52.0 million in 2009 to $109.1 million in 2010. The Company's share capital is not subject to external restrictions; however, the bank debt facility is based on certain covenants, all of which were met as at December 31, 2010 and 2009. The Company has not paid or declared any dividends since the date of incorporation, nor are any contemplated in the foreseeable future. 14. SUBSEQUENT EVENT In February 2011, the Company entered into financial commodity put contracts representing 4,000 barrels of oil per day at a floor price of $80 per barrel for the period January 1, 2012 to December 31, 2012. >>For further information: Abby Badwi, President and Chief Executive Officer, (403) 513-2694; Doug Urch, Executive VP, Finance and Chief Financial Officer, (403) 513-2691; Mark Hodgson, VP, Business Development, (403) 513-2695, Email: investorrelations@bankerspetroleum.com, Website: www.bankerspetroleum.com, AIM NOMAD: Canaccord Genuity Limited, Ryan Gaffney, Henry Fitzgerald-O'Connor, +44 20 7050 6500; AIM JOINT BROKERS: Canaccord Genuity Limited, Ryan Gaffney, Henry Fitzgerald-O'Connor, +44 20 7050 6500; Macquarie Capital Advisors, Ben Colegrave, Paul Connolly, +44 20 3037 5639