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Caza Oil & Gas, Inc. TSX: CAZ AIM: CAZA 
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Caza Oil & Gas, Inc. Announces Results for the Year Ended December 31, 2007
HOUSTON, TEXAS--(Marketwire - March 31, 2008) - Caza Oil & Gas, Inc. ("Caza" or "the Company") (TSX:CAZ)(AIM:CAZA) announces the Company's final results for the year ended December 31, 2007. Caza has hydrocarbon exploration, development and production assets in Texas, New Mexico and Louisiana USA.
Highlights of the year include:
- Shares admitted to trading on the Toronto Stock Exchange ("TSX") and AIM in December 2007.
- Fundraising of approximately US. $11.4 million net in initial public offering.
- Matthys McMillan #1 well discovered gas and is in production.
- Multiple offset development locations identified on Hite Offset Property, Texas.
- Oil and gas discovered with the E.W. Brown #1 well on the Thunder Stud Property.
Highlights since the year end include:
- Jonell Cerny Gas Unit #1 Well, successfully drilled and awaiting pipeline tie-in.
- The Mudslide Slim Federal 15 - #1 well successfully drilled and awaiting pipeline tie-in.
W. Michael Ford, CEO of Caza, commented:
"Caza is a young, growing company and the results from our exploration activities have added significantly to our asset base and provided continuing opportunities to grow our production, cash flow and net asset value.
Caza is planning to embark on a development drilling program on projects in Wharton County, Texas and Southeast New Mexico as a result of the success of our drilling activities. In addition exploitation operations are scheduled in the Wolfberry trend of the Permian Basin along with further exploration activity in Texas.
Caza continues to actively evaluate investment opportunities in addition to our on-going effort to identify opportunities on our existing assets."
Copies of the Company's financial statements for the year ended December 31, 2007 and the management's discussion and the Annual Information Form for the year ended December 31, 2007 are available on SEDAR at www.sedar.com.
President/CEO Statement
I am pleased to report to the shareholders of Caza Oil & Gas, Inc. ("Caza" or "the Company") significant progress, growth and development during the financial year ended December 31, 2007.
During the past year the company has achieved many of its immediate goals. These include admission to the Toronto Stock Exchange and admission to the AIM, a market operated by London Stock Exchange plc, on December 12, 2007, which was accompanied by an initial public offering fundraising of approximately US. $11.4 million net. The Company successfully operated and participated in the drilling of a number of wells, most significant was the Matthys McMillan #1 well in the Hite Offset Property which is now on production.
We are excited to announce that during 2007 proved + probable reserves increased by 516% consisting of 17.76 Bcfe at December 31, 2007 as compared to 2.88 Bcfe for the year ending December 31, 2006. Proved Developed Producing reserves during the same period increased by 228% consisting of 2.53 Bcf at December 31, 2007 as compared to 0.77 Bcf for the year ending December 31, 2006.
Caza is planning to embark on a development drilling program on projects in Wharton County, Texas and Southeast New Mexico. In addition exploitation operations are scheduled in the Wolfberry trend of the Permian Basin along with further exploration activity in Texas.
For the year ended December 31, 2007, the Company increased revenues from oil and gas sales by 223% from 2006 to $1.38 million. Caza is reporting a decreased net loss per share of $0.02 per share (2006 - $0.04 per share).
Principal Properties
The principal properties held by Caza Petroleum, Inc., a subsidiary of Caza, are located in the following areas:
a) Texas Gulf Coast;
b) South Louisiana;
c) Southeast New Mexico; and
d) Permian Basin of West Texas.
A description of Caza Petroleum's principal properties and prospects in these areas is set forth below. The description includes disclosure relating to the reserves or resources attributed to individual project and prospect areas by Netherland, Sewell and Associates Inc., independent petroleum engineers, in their report (the "NSAI Report") which evaluates the reserves of Caza Petroleum, Inc. as at December 31, 2007. The estimates of reserves for individual project areas may not reflect the same confidence level as estimates of reserves for all properties, due to the effects of aggregation.
Texas Gulf Coast
General
Caza Petroleum holds interests in approximately 12,100 gross acres (5,298 net acres) in a total of 13 properties and prospects in the Wilcox, Frio, and Yegua trends located in Wharton, Webb and Duval counties of Texas.
In the Wilcox trend, Caza Petroleum targets structural closures at depths of approximately 9,500 feet to 18,000 feet. Caza Petroleum's prospects in the Frio and Yegua trends are typically amplitude natural gas plays at depths of between 3,500 and 8,500 feet. All of Caza Petroleum's prospects in these properties have been generated through 3-D Seismic data, advanced reprocessing and attribute analysis.
The NSAI Report assigned proven, probable and possible net reserves of 50.8 Bcfe to Caza Petroleum's Texas Gulf Coast properties. The properties are all located within a few miles of the Matthys McMillan well and are located in areas which are well served by gathering systems.
Additionally, the Netherland, Sewell Associates Inc. report dated June 30, 2007 has assigned best estimate net prospective resources of 41.4 Bcf to Caza's Las Animas prospect.
As of December 31, 2007 Caza Petroleum was producing an average of 822 Mcfe/d net from its 3 gross (0.76 net wells) producing wells in this region.
Caza Petroleum's principal Texas Gulf Coast properties and prospects are described below.
Hite Offset Property
The Hite Offset property is located in the Wharton West Wilcox Field in the south central part of Wharton County, Texas. Caza Petroleum has interests in approximately 1,149 gross acres (225 net acres) and a 19.6% working interest (14.4% net revenue interest) in this property.
During 2007, Caza Petroleum, as operator, drilled the Matthys McMillan #1 well to a depth of 17,700 feet. The well was completed in the upper Wilcox formation and, as of December 31, 2007, was producing 722 mcfe/d net to Caza Petroleum.
Wilcox 116 Property
The Jonell Cerny Gas Unit #1 Well, was drilled to test the Wilcox 116 property which is located approximately 3 miles to the southwest of and on trend with the accumulation found by the Matthys McMillan #1 well. In February 2008, Caza Petroleum entered into two separate farmout agreements with Singular Oil & Gas Sands, LLC ("Singular") and Sojitz Gulf Exploration, Inc. ("Sojitz") on the Wilcox 116 Property in South Texas. Singular and Sojitz each acquired a 10.00% interest on a promoted basis. The transactions combined to reduced Caza Petroleum's working interest in the property from a 47.8% after completion working interest to a 29.9% working interest (which reduces to a 27.8% working interest after completion of the initial well) and a corresponding 20.9% net revenue interest.
Drilling operations commenced on January 15, 2008 and reached a total depth of 16,510 feet on March 3, 2008. Analysis of the log data indicates the well encountered Wilcox Sand pay at multiple intervals from 13,500 feet to 16,400 feet. Completion operations are planned to commence in April, following pipeline connection into the gathering system. Caza anticipates, depending on well performance, several additional development locations.
Puku Property
Caza Petroleum holds approximately 218.4 gross acres (76.4 net acres) and a 35% working interest (26.5% net revenue interest) in this property. A well is anticipated within 12 months for this property.
The property targets an attic gas accumulation that was penetrated by a commercially productive offsetting well.
Eland and Sable Properties
The Eland and Sable properties are located approximately one mile east of the Puku properties. Caza Petroleum holds an aggregate of approximately 362 gross acres (127 net acres) in the properties and a 35% working interest (25.1% net revenue interest) in each property. A well to test the properties is being planned for the second quarter of 2008.
The property targets an upthrown threeway high side closure in the Frio Formation.
Las Animas Prospect
The Las Animas prospect is located in Duval County, Texas. Caza Petroleum has leasehold interests in approximately 5,980 gross acres (2,567 net acres) in the prospect area made up of gross working interests ranging from 100% to 28% (with corresponding gross net revenue interests of 80% to 75%) in various tracts which, in conjunction with various agreements, results in a weighted average 42.8% working interest (30.0% net revenue interest) in this prospect. A well is anticipated within 12 months for this property.
The prospect targets two upthrown threeway high side closures in the Upper Wilcox Duval Complex. One is estimated to be 5,000 acres at the primary objective Upper Wilcox sand interval and the other is estimated to be 1,500 acres, both at depths of 14,000 to 18,000 feet.
South Louisiana
General
Caza Petroleum holds interests in approximately 4,100 gross acres (410 net acres) covering two properties in trends located in Calcasieu and Terrebonne Parish, Louisiana. The Dulac Field property is located in Terrebonne Parish and the Thunder Stud property is located in Calcasieu Parish. Following further evaluation Caza Petroleum does not intend to maintain its lease position on the Alligator Property.
Caza Petroleum's prospects in south Louisiana are predominantly focused on the Hackberry, Yegua and Middle Miocene trends. The Hackberry trend is typically located at depths between 8,500 and 10,000 feet. The Yegua and Middle Miocene structural and stratigraphic plays are at depths between 9,000 and 20,000 feet. All of Caza Petroleum's prospects in these properties have been generated through 3-D Seismic data, advanced reprocessing and attribute analysis.
Proven, probable and possible net reserves of 14.5 Bcfe have been assigned to Caza Petroleum's south Louisiana properties in the NSAI Report. As of December 31, 2007 Caza Petroleum was producing 235 Mcfe/d net from one gross (0.06 net) well in this region. All of Caza's south Louisiana properties are located in areas which are well served by gathering systems.
Caza Petroleum's principal Louisiana properties are described below.
Dulac Field Property
The Dulac Field property is located in Terrebonne Parish, Louisiana. Caza Petroleum holds approximately 200 gross acres (17 net acres) and an approximate 8.2% working interest (5.9% net revenue interest) in this property.
In July 2006, Falcon Bay, as operator, drilled the State Lease 18582 #1 well as an exploratory test well to a depth of 14,118 feet. The well was completed in the middle Miocene Eggerella sand and, as of December 31, 2007, was producing 235 Mcfe/d net to Caza Petroleum.
Thunder Stud Property
The Thunder Stud property is located in the southwest corner of Calcasieu Parish, Louisiana. Caza Petroleum holds a 10.0% non operated working interest (7.2% net revenue interest) in approximately 3,900 gross acres (390 net acres) subject to a back in after project payout reduction of 37.5%.
Caza Petroleum participated in the drilling of the E.W. Brown # 1 well on this property targeting the Yegua formation in the Phoenix Lake Field. This well reached a total depth of 17,905 feet on May 3, 2007.
The E.W. Brown # 1 well encountered both oil & gas potential from multiple intervals between 13,500 feet to 16,300. Caza Petroleum, as a non-operator, anticipates that an appraisal program will be undertaken, subject to partner and other approvals.
Southeast New Mexico
General
Caza Petroleum has interests in approximately 4,200 gross acres (1,700 net acres) in four properties in Southeast New Mexico. After further evaluation, Caza Petroleum elected not to participate in the drilling of the Northwest Raptor Property.
Caza Petroleum's properties target primarily Pennsylvanian Clastics formations consisting of lowstand gas and condensate bearing marine deltaic sandstone reservoirs in the Atoka Morrow formations at depths ranging from 8,000 feet to 15,000 feet and Permian oil objectives at depths ranging from 2,000 to 8,500 feet.
Caza Petroleum's land holdings in Southeast New Mexico are a combination of state and federal leases and limited fee lands. The state and federal jurisdictions hold periodic auctions for lease which provide the opportunity for Caza Petroleum to acquire additional land positions over time. Leases for federal lands have a 10 year term while state leases have a five year term.
NSAI has assigned probable net reserves of 3.8 Bcfe to Caza Petroleum's interest in its Southeast New Mexico prospects in the NSAI Report. All of these properties are located in areas which are well served by gathering systems.
Caza has applied for drilling permits on all its New Mexico Properties.
Lynch Property
The Mudslide Slim Federal 15-1 well, located in Lea County, New Mexico, was drilled to test the Lynch (Morrow) Prospect. Caza Petroleum has earned a 40.0% working interest (31.3% net revenue interest) before payout which reduces to a 27.8% working interest (20.9% net revenue interest) after payout of the initial well in this property. Caza Petroleum holds approximately 320 gross acres 128 net acres.
Drilling operations were commenced on January 13, 2008 and reached a total depth of 13,513 feet on March 2, 2008. Analysis of log data indicates the well encountered Morrow Sand Pay at multiple intervals from 13,040 feet to 13,160 feet. Completion operations are planned to commence in May pending a pipeline connection into the gathering system.
China Draw Property
The China Draw property is located in Eddy County. Caza Petroleum holds approximately 1,740 gross acres (580 net acres) and a 33.3% working interest (28.2% net revenue interest) in this property.
Forehand Ranch Property
The Forehand Ranch property is located in Eddy County. Caza Petroleum holds approximately 800 gross acres (350 net acres) and a weighted average 43.3% working interest (36.6% net revenue interest) in this property.
Azotea Mesa Property
The Azotea Mesa property is located in Eddy County. Caza Petroleum holds 1,280 gross acres (640 net acres) and a 50.0% working interest (42.3% net revenue interest) in this property.
Permian Basin of West Texas
General
Caza Petroleum has interests in approximately 11,500 gross acres (3,700 net acres) in the Permian Basin of West Texas located in Crane, Upton and Sutton counties.
These properties target the Spraberry/Wolfcamp formation at depths of 8,000 to 10,000 feet and the Canyon Sands formation at depths of 6,500 to 9,000 feet.
NSAI has assigned proven, probable and possible net reserves of 3.9 Bcfe to Caza Petroleum's interest in its Permian Basin properties. Caza Petroleum is currently producing 80 Mcf/d net from three gross (1.9 net) producing wells located in this region.
All of Caza's Permian Basin of West Texas properties are located in areas which are well served by gathering systems.
Caza Petroleum's principal Permian Basin of West Texas properties are described below.
Glass Ranch Property
The Glass Ranch property is located in Crane and Upton counties. Caza Petroleum holds approximately 890 gross acres (330 net acres) and a weighted average 37.6% working interest (28.2% net revenue interest) in this property. It is anticipated that Caza will participate in several wells on this property in 2008.
Glass Ranch 2 Property
The Glass Ranch 2 property is recently acquired acreage and is located in Crane and Upton counties. Caza Petroleum holds approximately 314 gross acres (314 net acres) and a 100% working interest (75% net revenue interest) in this property.
The property targets the Spraberry/Wolfcamp formation.
Aldwell Ranch Property
The Aldwell Ranch property is located in the southwest part of Sutton County, Texas. Caza Petroleum holds 5,000 gross (2,500 net) acres of farmout acreage in this property and a 50.0% working interest before completion and 45.5% working interest after completion (34.1% net revenue interest) in the north block which has been partially developed and approximately 5,500 gross (520 net) acres and a 9.4% working interest (7.5% net revenue interest) of undeveloped land in the southern block. It is anticipated that Caza will participate in an under balanced well on this property in 2008.
Caza Petroleum is currently producing 80.0 Mcf/d net from three gross (1.9 net) producing wells located in the area.
The property targets the Canyon Sands formation.
Health and Safety
Caza as the operator of 90% of its properties have adopted and maintain high environmental standards and safety programs. In addition, environmentally sympathetic methods of drilling and production are employed.
Conclusion and the Future
In Summary, Caza is a young, growing company with strong news flow expected from our operations in the US.
The results from our continuing drilling, development program have added significantly to our asset and reserve base. In 2007 our average production was increased by 180% resulting in revenues from oil and gas sales increasing 223% from 2006.
Our substantial investments in key projects are beginning to bear fruit; in addition, we have a growing prospect inventory resulting from our geological and geophysical efforts.
Caza is also very active in evaluating potential deals, some of which I anticipate will be finalized in 2008.
I would like to take this opportunity to thank our shareholders, my fellow directors and management, and our advisers in the US, Canada and the UK for their collective efforts in making 2007 an extremely successful year for Caza.
W. Michael Ford
CEO/President
March 28, 2008
In accordance with AIM Rules - Guidance Note for Mining, Oil and Gas Companies, the information contained in this announcement constituting a resource or drilling update has been reviewed and approved by Anthony B. Sam, Vice President Operations of Caza who is a Petroleum Engineer and a member of the Society of Petroleum Engineers.
The reserves data set out in this announcement have been extracted from the Company's Annual Information Form (available on SEDAR at www.sedar.com). The evaluation of the reserves data included in the Annual Information Form was carried out in accordance with standards set out in the Canadian Oil and Gas Evaluation Handbook prepared jointly by the Society of Petroleum Engineers (Calgary Chapter) and the Canadian Institute of Mining, Metallurgy & Petroleum (Petroleum Society). Certain key terms used in the Annual Information Forum and this announcement are set out below:
bbl one barrel, each barrel representing 34.972 Imperial gallons
or 42 U.S. gallons
Bcf billion cubic feet
Bcfe billion cubic feet equivalent
boe barrels of crude oil equivalent derived by converting natural
gas to crude oil in the ratio of six thousand cubic feet of
natural gas to one barrel of crude oil
Mcf one thousand cubic feet
Mcf/d one thousand cubic feet per day
Mcfe one thousand of cubic feet of natural gas equivalent derived
by converting crude oil to natural gas in the ratio of one barrel
of oil into six thousand cubic feet of natural gas
Mcfe/d one thousand of cubic feet of natural gas equivalent per day
Boe or Mcfe may be misleading, particularly if used in isolation. A boe conversion of 6 Mcf: 1 bbl or a Mcfe conversion ratio of 1 bbl : 6 Mcf is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the well head.
ADVISORY REGARDING FORWARD-LOOKING STATEMENTS - In the interests of providing Caza shareholders and potential investors with information regarding Caza, including management's assessment of Caza's and its subsidiaries' future plans and operations, certain statements contained in this news release are forward-looking statements or information within the meaning of applicable securities legislation, collectively referred to herein as "forward-looking statements". Forward-looking statements in this news release include, but are not limited to: future economic and operating performance (including per share growth, cash flow and increase in net asset value); future drilling costs; anticipated growth and success of resource plays and the expected characteristics of resource plays; free cash flow which may be generated in 2008 and beyond, and potential uses for such free cash flow; anticipated production and sales of oil, natural gas and NGLs in 2008; anticipated impact and success of Caza's price hedging strategy, if any; anticipated costs; anticipated prices for oil and natural gas; anticipated capital investment in 2008 and the allocation thereof; anticipated capital inflation; anticipated capital and operating cost efficiencies; anticipated growth in hydrocarbon production; forecast cash flow for 2008 and the anticipated ability to meet guidance targets.
Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur, which may cause the company's actual performance and financial results in future periods to differ materially from any estimates or projections of future performance or results expressed or implied by such forward-looking statements. These risks and uncertainties include, among other things: volatility of and assumptions regarding oil and gas prices; assumptions based upon the company's current guidance; fluctuations in currency exchange and interest rates; product supply and demand; market competition; risks inherent in the company's marketing operations, including credit risks; imprecision of reserve estimates and estimates of recoverable quantities of oil, natural gas and liquids from resource plays and other sources not currently classified as proved; the company's ability to replace and expand oil and gas reserves; the company's ability to generate sufficient cash flow from operations to meet its current and future obligations; the company's ability to access external sources of debt and equity capital; the timing and the costs of well and pipeline construction; blowouts, fires, explosions and other sudden emergencies; drilling difficulties, such as lost circulation; the company's ability to secure adequate product transportation; changes in royalty, tax, environmental and other laws or regulations or the interpretations of such laws or regulations; the risk of terrorist threats; risks associated with future lawsuits and regulatory actions made against the company; and other risks and uncertainties described from time to time in the reports and filings made with securities regulatory authorities by Caza.
Although Caza believes that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. Readers are cautioned that the foregoing list of important factors is not exhaustive. Furthermore, the forward-looking statements contained in this news release are made as of the date of this news release, and, except as required by law or regulation, Caza does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained in this news release are expressly qualified by this cautionary statement.
Financial outlook information contained in this press release about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on management's assessment of the relevant information currently available. Readers are cautioned that such financial outlook information contained in this press release should not be used for purposes other than for which it is disclosed herein.
Auditors' Report
To the Shareholders of Caza Oil & Gas, Inc.
We have audited the consolidated balance sheets of Caza Oil & Gas, Inc. as at December 31, 2007 and 2006, the consolidated statements of Net Loss and Comprehensive Income (Loss), and Retained Earnings (Deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2007 and 2006 and the results of its operations and its cash flows for the years then ended, in accordance with Canadian generally accepted accounting principles.
(signed) "Deloitte & Touche LLP"
Chartered Accountants
Calgary, Canada
March 7, 2008
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Caza Oil & Gas, Inc.
Consolidated Balance Sheets
December 31, December 31,
(In Thousands of United States dollars) 2007 2006
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Assets
Current
Cash and cash equivalents $ 13,195 $ 13,697
Accounts receivable 3,271 2,155
Prepaid and other 334 123
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16,800 15,975
Petroleum and equipment (Note 3) 20,354 8,243
Future income tax asset (Note 5) 426 -
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$ 37,580 $ 24,218
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Liabilities
Current
Accounts payable and accrued liabilities $ 6,877 $ 4,171
Asset retirement obligations (Note 4) 286 56
Future income taxes (Note 5) - 221
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286 277
Shareholders' Equity
Share capital (Note 6) 30,811 18,923
Contributed surplus (Note 6(h)) 2,787 2,250
Deficit (3,181) (1,403)
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30,703 20,047
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$ 37,580 $ 24,218
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See accompanying notes to the consolidated financial statements
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Caza Oil & Gas, Inc.
Consolidated Statements of Net Loss and Comprehensive Income (Loss), and
Retained Earnings (Deficit)
For the Years Ended
(In Thousands of United States dollars, December 31, December 31,
except per share amounts) 2007 2006
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Revenues
Petroleum and natural gas $ 1,380 $ 427
Other income - 240
Interest income 455 192
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1,835 859
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Expenses
Production 464 129
General and administrative 3,204 3,217
Depletion, depreciation, amortization and
accretion 521 121
Interest 37 29
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4,226 3,496
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Loss before income taxes (2,391) (2,637)
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Income taxes (Note 5)
Current income taxes 30 18
Future income taxes (643) (87)
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(613) (69)
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Net loss and comprehensive loss for the year (1,778) (2,568)
Retained Earnings (Deficit), beginning of year (1,403) 2,794
Amount ascribed to exchangeable share rights
on acquisition of Caza petroleum (Note 6) - (970)
Future income taxes recognized on acquisition
of Caza Petroleum (Note 5) - (308)
Distributions - (351)
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Deficit, end of year $ (3,181) $ (1,403)
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Net loss per share
- basic and diluted (0.02) $ (0.04)
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Weighted average shares outstanding
- basic and diluted (1) 75,003,890 67,950,466
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(1) The options and warrants have been excluded from the diluted loss per
share computation as they are anti-dilutive
See accompanying notes to the consolidated financial statements
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Caza Oil & Gas, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, December 31,
(In Thousands of United States dollars) 2007 2006
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CASH FLOWS RELATED TO THE FOLLOWING ACTIVITIES:
OPERATING
Net loss for the year (1,778) (2,568)
Adjustments for items not affecting cash:
Depletion, depreciation, amortization and
accretion 521 121
Stock-based compensation 364 2,250
Future income taxes recognized on acquisition
of Caza Petroleum - (308)
Future income tax expense (recovery) (647) 221
Changes in non-cash working capital (Note 9(a)) (760) 165
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Cash flow from (used in) operating activities (2,300) (119)
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FINANCING
Distributions - (351)
Proceeds from issuance of shares, net of issue
costs 11,888 17,953
Increase in notes payable - 280
Repayment of notes payable - (397)
Changes in non-cash working capital (Note 9(a)) 837 -
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Cash flow from financing activities 12,725 17,485
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INVESTING
Exploration and development expenditures (11,734) (5,175)
Purchase of equipment (495) (24)
Changes in non-cash working capital (Note 9(a)) 1,302 1,328
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Cash flow (used in) investing activities (10,927) (3,871)
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INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (502) 13,945
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 13,697 202
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CASH AND CASH EQUIVALENTS, END OF YEAR 13,195 13,697
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Supplementary information (Note 9)
See accompanying notes to the consolidated financial statements
1. Basis of Presentation
Caza Oil & Gas, Inc. ("Caza" or the "Company") was incorporated under the laws of British Columbia on June 9, 2006 for the purposes of acquiring shares of Caza Petroleum, Inc. ("Caza Petroleum"). The Company and its subsidiaries are engaged in the exploration for and the development, production and acquisition of, petroleum and natural gas reserves. On December 12, 2007 the Company's shares were listed for trading on the TSX and AIM markets.
Caza owns 71% of the outstanding common shares of Caza Petroleum. The remaining interest in Caza Petroleum is held by senior management of Caza and may be exchanged for common shares pursuant to a Share Exchange and Shareholders Agreement (see Note 6(e)). Caza Petroleum was amalgamated with Falcon Bay Energy, LLC ("Falcon Bay") on September 14, 2006.
As all of the entities (Caza, Caza Petroleum and Falcon Bay) were under common control, these consolidated financial statements of Caza and its subsidiaries have been presented on a continuity-of-interest basis of accounting and represent the activities of all of the above noted entities from the date that each of them commenced operations. The Company's consolidated financial statements presented for comparative purposes reflect the financial position, results of operations and cash flows as if Caza had been consolidated with Caza Petroleum and Falcon Bay since inception.
Caza's reporting currency is the United States ("US") dollar as the majority of its transactions are denominated in the currency.
2. Significant Accounting Policies
The consolidated financial statements of the Company have been prepared by management in accordance with Canadian generally accepted accounting principles. The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ from those estimates. These consolidated financial statements have, in management's opinion, been properly prepared using careful judgement with reasonable limits of materiality and within the framework of the significant accounting policies summarized below:
Basis of consolidation
The consolidated financial statements include those of the Caza, Caza Petroleum, and Caza Petroleum's wholly owned subsidiaries Caza Operating, LLC, Falcon Bay Sutton County, LLC and Falcon Bay Operating, LLC. All material inter-company transactions have been eliminated.
(b) Financial instruments
As of January 1, 2007, Caza adopted the Canadian Institute of Chartered Accountants ("CICA") Section 3855 "Financial Instruments - Recognition and Measurement;" Section 3861, "Financial Instruments - Disclosure and Presentation" and Section 3865 "Hedges."
CICA Section 3855 prescribes when a financial instrument is to be recognized on the balance sheet and at what amount. It also specifies how financial instrument gains and losses are to be presented. All financial instruments are classified into one of the following five categories: held for trading, held-to-maturity, loans and receivables, available-for-sale financial assets, or other financial liabilities. Initial and subsequent measurement and recognition of changes in the value of financial instruments depends on their initial classification:
- Held-to-maturity investments, loans and receivables, and other financial liabilities are initially measured at fair value and subsequently measured at amortized cost. Amortization of premiums or discounts and losses due to impairment are included in current period net earnings.
- Available-for-sale financial assets are measured at fair value. Revaluation gains and losses are included in other comprehensive income until the asset is removed from the balance sheet.
- Held for trading financial instruments are measured at fair value. All gains and losses are included in net earnings in the period in which they arise.
- All derivative financial instruments are classified as held for trading financial instruments and are measured at fair value, even when they are part of a hedging relationship. All gains and losses are included in net earnings in the period in which they arise.
The financial instruments recognized on Caza's balance sheet were deemed to approximate their estimated fair values, and therefore no further adjustments were required upon adoption of the new sections on January 1, 2007. There were no financial assets on the balance sheet which were designated as held-for-trading or available-for-sale. All financial assets were classified as loans or receivables and are accounted for on an amortized cost basis, and all financial liabilities were classified as other liabilities on January 1, 2007. There have been no changes to these classifications at December 31, 2007. The fair values of these financial instruments are the same as their carrying values. All transaction costs will be expensed.
CICA Section 3865 provides alternative treatments to Section 3855 for entities which choose to designate qualifying transactions as hedges for accounting purposes. It replaces and expands on Accounting Guideline 13 "Hedging Relationships", and the hedging guidance in Section 1650 "Foreign Currency Translation" by specifying how hedge accounting is applied and what disclosures are necessary when it is applied. Caza did not have any hedges during 2007.
(c) Comprehensive income
On January 1, 2007, Caza adopted CICA Section 1530 which introduces a new requirement to temporarily present certain gains and losses from changes in fair value outside net income. It includes unrealized gains and losses, such as: changes in the currency translation adjustment relating to self-sustaining foreign operations; unrealized gains or losses on available-for-sale investments; and the effective portion of gains or losses on derivatives designated as cash flow hedges. The application of this revised standard did not result in comprehensive income (loss) being different from the net loss for the periods presented.
(d) Cash and cash equivalents
Cash and short-term investments consists of cash on deposit and money market instruments that are highly liquid having a maturity date of not more than ninety days at the time of purchase.
(e) Joint venture operations
Substantially all of the Company's petroleum and natural gas exploration activities are conducted jointly with others. These consolidated financial statements reflect only the Company's proportionate interest in such activities.
(f) Property and equipment
The Company follows the full cost method of accounting for oil and natural gas operations whereby all costs relating to the acquisition, exploration and development of oil and natural gas reserves are initially capitalized into a single United States cost centre. 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, related production equipment costs, asset retirement and abandonment costs and overhead charges directly related to acquisition, exploration and development activities.
Capitalized costs, excluding costs related to unproven properties, are depleted and depreciated using the unit-of-production method based on estimated proven oil and natural gas reserves before deduction of royalties as determined by independent petroleum engineers. Petroleum and natural gas reserves and production are converted to thousand cubic feet of gas equivalent using a ratio of one barrel of oil to six thousand cubic feet of natural gas.
Costs of acquiring and evaluating unproved properties are initially excluded from depletion calculations. These unevaluated properties are assessed periodically to ascertain whether impairment has occurred. When proved reserves are assigned or the property is considered to be impaired, the cost of the property or the amount of the impairment is added to costs subject to depletion.
Proceeds from the sale of petroleum and natural gas properties will be applied against capitalized costs, with no gain or loss recognized, unless such a sale would result in a greater than 20% change in the depletion and depreciation rate.
A limit is placed on the carrying value of the net capitalized costs in each cost centre in order to test impairment. The Company is required to perform this impairment test at least annually. An impairment loss exists when the carrying value of a cost centre exceeds the estimated undiscounted future net cash flows associated with the cost centre's proved reserves. If an impairment loss is determined to exist, the costs carried on the balance sheet in excess of the discounted future net cash flows associated with the cost centre's proved plus probable reserves are charged to income. The Company did not incur an impairment loss in 2007. Reserves are determined pursuant to the Canadian Securities Administrators' National Instrument 51-101 "Standard of Disclosure for Oil and Gas Activities".
Office equipment and furniture is carried at cost and depreciated on a straight line basis over the estimated service lives of five to seven years.
(g) Revenue recognition
Revenue from the sale of oil, gas and liquids is recognized based on volume delivered at contractual delivery points and rates. The costs associated with the delivery, including operating and transportation expenses, are recognized in the same period in which the related revenue is earned and recorded.
(h) Future income taxes
The Company follows the tax liability method of accounting for income taxes. Under this method, future tax assets and liabilities are determined based on differences between the carrying value and the tax basis of assets and liabilities, and measured using the substantively enacted tax rates and laws expected to be in effect when the differences are expected to reverse. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period in which the change is substantively enacted. Future income tax assets are only recognized to the extent it is more likely than not that sufficient future taxable income will be available to allow the future income tax asset to be realized.
(i) Asset retirement obligation
The Company recognizes the fair value of a liability for an asset retirement obligation in the period in which it is incurred or when a reasonable estimate of the fair value can be made, and records a corresponding increase in the carrying value of the related long-lived asset. The fair value is determined through a review of engineering studies, industry guidelines, and management's estimate on a site-by-site basis. The liability is subsequently adjusted for the passage of time, which is recognized as an accretion expense in the consolidated statement of net loss. The liability is also adjusted due to revisions in either the timing or the amount of the original estimated cash flows associated with the liability. Actual costs incurred upon settlement of the asset retirement obligations are charged against the asset retirement obligation to the extent of the liability recorded.
(j) Foreign currency translation
The Company translates foreign currency denominated monetary assets and liabilities at the exchange rate in effect at the balance sheet date and non-monetary assets and liabilities are translated at historical exchange rates. Revenues and expenses are translated at transaction date exchange rates except depletion and depreciation expense, which is translated at the same historical exchange rate as the related assets. Exchange gains or losses are included in the determination of net income as foreign exchange loss.
(k) Stock-based compensation
The Company accounts for stock-based compensation using the fair-value method of accounting for stock options issued to directors, officers and employees using the Black-Scholes option-pricing model. Under this method, the compensation costs attributed to the stock options are measured at the time of grant or issuance and amortized over the vesting period with a corresponding increase to contributed surplus. When stock options are exercised, the associated amounts previously recorded as contributed surplus are reclassified to common share capital. The Company does not incorporate an estimated forfeiture rate for stock options that will not vest but instead accounts for forfeitures as a change in estimate in the period in which they occur.
(l) Per share information
Basic per share amounts are calculated using the total weighted average number of common shares outstanding during the period. Shares outstanding also include common shares issuable upon exchange of Caza Petroleum shares (See Note 6(e)). Diluted per share calculations reflect the exercise or conversion of potentially dilutive securities or other contracts to issue shares at the later of the date of grant of such securities or the beginning of the period. The Company computes diluted earnings per share using the treasury stock method to determine the dilutive effect of securities or other contracts. Under this method, the diluted weighted average number of shares is calculated assuming the proceeds that arise from the exercise of outstanding, in-the-money options are used to purchase common shares of the Company at their average market price for the period. No adjustment to diluted earnings per share or diluted shares outstanding is made if the result of the calculations is anti-dilutive.
(m) Measurement uncertainty
The operations of the Company are complex, and regulations and legislation affecting the Company are continually changing. Although the ultimate impact of these matters on the net income or loss cannot be determined at this time, it could be material for any one quarter or year. Management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and revenues and expenses during the reporting period. Actual results can differ from those estimates.
Recorded amounts for depletion and depreciation of petroleum and natural gas properties and equipment are based on estimates of oil and natural gas reserves. The ceiling test and impairment calculations are based on estimates of oil and natural gas reserves, future costs required to develop those reserves and the fair value of unproved properties. By their nature, these estimates of reserves and the related future cash flows are subject to measurement uncertainty, and the effect on the consolidated financial statements of future periods could be significant.
The value of the asset retirement obligation depends on estimates of current market interest rates, future restoration and reclamation expenditures and the timing of expenditures. By their nature, these estimates are subject to measurement uncertainty and the effect on the consolidated financial statements of changes of estimates in future periods could be significant.
The consolidated financial statements include accruals based on the terms of existing joint venture agreements. Due to varying interpretations of the definition of terms in these agreements the accruals made by management in this regard may be significantly different from those determined by the Company's joint venture partners.
The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. By their nature, these estimates are subject to measurement uncertainty and the effect on the consolidated financial statements of changes of estimates in future periods could be significant.
The amounts recorded for the utilization of future tax assets subject to an expiry date are based on estimates of future cash flows and profitability. By their nature, these estimates are subject to measurement uncertainty and the effect on the consolidated financial statements of changes of estimates in future periods could be significant.
(n) Accounting Changes
On January 1, 2007, Caza adopted CICA Section 1506, "Accounting Changes", provides expanded disclosures for changes in accounting policies, accounting estimates and corrections of errors. Under the new standard, accounting changes should be applied retrospectively unless otherwise permitted or where impracticable to determine. As well, voluntary changes in accounting policy are made only when required by a primary source of GAAP or the change results in more relevant and reliable information.
(o) Accounting pronouncements
The Company has assessed new and revised accounting pronouncements that have been issued that are not yet effective and determined that the following may have a significant impact on the Company:
- As of January 1, 2008, Caza will be required to adopt two new CICA standards, Section 3862 "Financial Instruments - Disclosures" and Section 3863 "Financial Instruments - Presentation," which will replace Section 3861 "Financial Instruments - Disclosure and Presentation." The new disclosure standard increases the emphasis on the risks associated with both recognized and unrecognized financial instruments and how those risks are managed. The new presentation standard carries forward the former presentation requirements. The new financial instruments presentation and disclosure requirements were issued in December 2006 and the Company is assessing the impact on its consolidated financial statements.
- As of January 1, 2008, Caza will be required to adopt new CICA standard, Section 1535 "Capital Disclosures," which will require companies to disclose their objectives, policies and processes for managing capital. In addition, disclosures are to include whether companies have complied with externally imposed capital requirements. The new capital disclosure requirements were issued in December 2006, and the Company is assessing the impact on its consolidated financial statements.
- As of January 1, 2008, the Company will be required to adopt CICA Handbook Section 3031 Inventory. This new standard is effective for interim and annual financial statements relating to fiscal years beginning on or after July 1, 2007.
- In January 2006, the CICA Accounting Standards Board ("AcSB") adopted a strategic plan for the direction of accounting standards in Canada. As part of that plan, accounting standards in Canada for public companies are expected to converge with International Financial Reporting Standards ("IFRS") by the end of 2011. The Company continues to monitor and assess the impact of convergence of Canadian GAAP and IFRS.
- In February 2008, the CICA issued Section 3064 Goodwill and Other Intangible Assets, replacing Section 3062 Goodwill and Other Intangible Assets and Section 3450 Research and Development Costs. Various other changes have been made to other sections of the CICA Handbook for consistency. The new Section will be applicable to financial statements relating to fiscal years beginning on or after October 1, 2008. Accordingly, the Company will adopt the new standard for its fiscal year beginning January 1, 2009. The new Section establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062.
3. Property and Equipment
--------------------------------------------------------
2007 2006
--------------------------------------------------------
Accumulated Accumulated
depletion Net depletion Net
and Book and Book
Cost depreciation Value Cost depreciation Value
--------------------------------------------------------
Petroleum and
natural gas
properties and
equipment $21,089 $ 1,201 $19,888 $8,954 $ 766 $8,188
Office equipment
and furniture 597 131 466 102 47 55
--------------------------------------------------------
$21,686 $ 1,332 $20,354 $9,056 $ 813 $8,243
--------------------------------------------------------
At December 31, 2007 the cost of petroleum and natural gas properties includes $8,133 (December 31, 2006 - $6,674) relating to unproven properties which have been excluded from costs subject to depletion and depreciation.
The Company capitalized general and administrative expenses of $1,528 in the year ended December 31, 2007 (2006 - $463) relating to exploration and development activities of which $173 related to stock based compensation in 2007 (2006 - $Nil).
The Company performed an impairment test at December 31, 2007 to assess whether the carrying value of its petroleum and natural gas properties exceeds fair value. No impairment was recorded as at December 31, 2007. The petroleum and natural gas future prices (adjusted for quality differentials) are based on commodity price forecasts of the Company's independent reserve evaluators.
The following table outlines benchmark prices used in the impairment test at December 31, 2007:
NYMEX Natural
Crude Oil Gas
Year ($/bbl) ($/mmbtu)
------------------------------------------------------------------------
2008 90.86 8.70
2009 88.42 8.48
2010 86.05 8.59
2011 85.64 8.57
Thereafter (inflation %) +2.0%/yr +2.0%/yr
------------------------------------------------------------------------
4. Asset Retirement Obligations
The following table presents the reconciliation of the beginning and ending aggregate carrying amount of the obligation associated with the retirement of oil and gas properties:
2007 2006
--------- ---------
Asset retirement obligation, beginning of year $ 56 $ 160
Obligations incurred 90 10
Accretion expense 3 2
Obligations settled - (116)
Change in estimates 137 -
--------- ---------
Asset retirement obligation, end of year $ 286 $ 56
--------- ---------
The undiscounted amount of cash flows, required over the estimated reserve life of the underlying assets, to settle the obligation, adjusted for inflation, is estimated at $398 (2006 - $62). The obligation was calculated using a credit-adjusted risk free discount rate of 6 percent and an inflation rate of 3 percent. It is expected that this obligation will be funded from general Company resources at the time the costs are incurred with the majority of costs expected to occur between 2009 and 2020.
5. Income Taxes
The following is a reconciliation of income taxes, calculated at the statutory combined federal and provincial income tax rates, to the income tax recovery included in the consolidated statements of net loss.
--------------------------------------------------------------------------
Years ended December 31,
--------------------------------------------------------------------------
($000's) 2007 2006
Net Income (loss) before taxes (2,391) (2,637)
Income tax (recovery) at statutory rate of (768) (847)
32.12% (2006 - 32.12 %)
Difference in statutory tax rates: Canada vs. US (69) (76)
Stock-based compensation 127 723
Taxable income taxed in the LLC's - 37
Texas franchise tax 30 18
Other 67 76
-----------------------
Total (613) (69)
-----------------------
Prior to September 14, 2006, the operations of the Company were conducted in a Texas limited liability company, Falcon Bay, and three other limited liability companies that were wholly owned by Falcon Bay. All of the Company's operations prior to that time were conducted in the United States. As a limited liability company, the combined incomes of the three companies were not subject to U.S. federal income taxation but were instead allocated to and taxed in the hands of its owners.
On September 14, 2006, when Falcon Bay merged into Caza Petroleum, the Company's operations became subject to U.S. federal income tax at the Company level. The following items detail the differences that result in the provision for income taxes not being equal to the combined United States federal and state tax rate of 35% applied to income (loss) before taxes.
The components of future income tax liabilities (assets) at December 31, 2007 and 2006 are as follows:
-------------------------------------------------------------------------
($000's) 12/31/2007 12/31/2006
-------------------------------------------------------------------------
Future income tax liability (asset):
Petroleum and natural gas properties 4,079 770
Net operating losses carried forward (4,505) (549)
-------------------------------------------------------------------------
Net future income tax liability (asset) (426) 221
-------------------------------------------------------------------------
The Company has the following losses available to be carried forward:
-------------------------------------------------------------------------
Expiring at December 31, Amounts
-------------------------------------------------------------------------
($000's)
US Canada
2026 1,524 205
2027 11,085 1,065
-------------------------------------------------------------------------
6. Share Capital
(a) Authorized
Unlimited number of voting common shares.
(b) Issued
---------------------------------------------
2007 2006
---------------------------------------------
Amounts Amounts
Shares ($000's) Shares ($000's)
---------------------------------------------
Opening balance
common shares 44,030,000 $ 13,478 - $ -
Incorporated on
June 9, 2006 - - 1 -
Redemption of
Initial share - - (1) -
Founders shares
(Note 6 (c)) - - 5,000,000 243
Initial
offering shares
(Note 6 (d)(i)) - - 34,420,000 11,659
1st Over-allotment
closing (Note 6 (d)(i)) - - 4,610,000 1,576
2nd Over-allotment
closing (Note 6 (d)(i)) 970,000 345 - -
Exchangeable shares 1,498,000 52 - -
Entitlement shares
(Note 6 (d)(iv)) 3,442,000 - - -
Entitlement Shares
(Note 6 (d)(iv)) 558,000 - - -
IPO Shares
(Note 6 (d)(v)) 18,821,000 11,162 - -
---------------------------------------------
Balance end of year 69,319,000 25,037 44,030,000 $ 13,478
---------------------------------------------
Opening balance
exchangeable rights
(Note 6(e)) 28,000,000 970 - -
Issuance of
exchangeable shares - - 28,000,000 970
Rights exercised
March 8, 2007 (1,103,200) (38) - -
Rights exercised
April 20, 2007 (394,800) (14) - -
---------------------------------------------
Balance end of year 26,502,000 918 28,000,000 970
---------------------------------------------
Opening balance
warrants 21,856,800 4,475 - -
Initial offering
warrants
(Note 6 (d)(i)(ii)) - - 17,210,000 3,700
Initial offering
broker warrants
(Note 6 (d)(iii)) - - 2,065,200 246
1st Over-allotment
warrants
(Note 6 (d)(i)(ii)) - - 2,305,000 496
1st Over-allotment broker
warrants (Note 6
(d)(iii)) - - 276,600 33
2nd Over-allotment
warrants
(Note 6 (d)(i)(ii)) 485,000 104 - -
2nd Over-allotment
broker warrants
(Note 6 (d)(iii)) 58,200 7 - -
Entitlement warrants
September 22, 2007
(Note 6 (d)(iv)) 1,721,000 - - -
Entitlement warrants
November 21, 2007
(Note 6 (d)(iv)) 279,000 - - -
IPO broker warrants
(Note 6 (d)(v)) 700,000 270 - -
---------------------------------------------
Balance end of year 25,100,000 4,856 21,856,800 4,475
---------------------------------------------
---------------------------------------------
$ 30,811 $ 18,923
---------------------------------------------
(c) Founders Shares:
On August 28, 2006, the Company completed a founder's common share offering of 5,000,000 shares at a purchase price of US$0.05 per share. A stock-based compensation expense of $2,250 was recognized on the issuance of the founder's shares.
(d) Initial Placement:
(i) On September 22, 2006, the Company completed the initial closing of a private equity offering of 34,420,000 units at a purchase price of US$0.50 per unit. Each unit consisted of one common share, 1/2 of a warrant and one entitlement right (see Note d(iv)). Each full warrant gives the holder the right to purchase one common share at an exercise price of US$1.00 per common share. Share issuance costs of $6,287 have been netted against this offering. On November 20, 2006, the Company completed its first over-allotment closing of 4,610,000 units. On January 17, 2007 the Company completed its second over-allotment closing of 970,000 units. The initial closing of the private equity offering and subsequent over-allotment closings are referred to as the "Initial Placement". The Company has allocated US$0.215 per warrant to the warrants issued in conjunction with the Private Equity Offering, with the remaining value allocated to the common shares.
(ii) Each full warrant is exercisable until the earlier of (i) three years after the date the common shares are listed on the Toronto Stock Exchange or the TSX Venture Exchange, subject to reduction by the Company to such lesser time period as may be required by the exchange on which the Company's securities are listed and (ii) four years following the closing date on which the warrants were acquired.
(iii) In connection with the Initial Placement, the Company issued 2,400,000 warrants (the "Broker Warrants") to the agents as partial consideration for their services rendered in connection with the Initial Placement. Each Broker Warrant entitles the holder to purchase one common share at a price of US$0.50 until March 22, 2008 in the case of 334,800 warrants and March 31, 2008 for the balance of the warrants. The Company ascribed US$0.119 per warrant to each of the Broker Warrants. No Broker Warrants have been exercised at December 31, 2007.
The fair value of each warrant and Broker Warrant was determined using the assumptions set out below:
-------------------------------------------------------------------------
December December
31, 2007 31, 2006
-------------------------------------------------------------------------
Warrants
Exercise price - US$1.00
Risk-free interest rate - 4.75%
Expected maturity (years) - 3.0
Expected volatility - 88.16%
Dividend yield - 0%
Broker Warrants
Exercise price US$0.79 US$0.50
Risk-free interest rate 4.00% 4.75%
Expected maturity (years) 2.0 1.5
Expected volatility 88.16% 88.16%
Dividend yield 0% 0%
(iv) As part of the Initial Placement, the Company issued to the purchasers, liquidity entitlements, which provided purchasers the right to receive for no additional consideration additional common shares equal to 10% of the common shares purchased in the Initial Placement if a "liquidity event" did not occur within a specified time period. The Company issued additional common shares for these liquidity entitlements in the amount of 3,442,000 shares on September 22, 2007, and 558,000 shares on November 20, 2007. Additionally, the liquidity entitlements required a comparable adjustment to be made to the number of shares purchasable from exercise of the warrants received in the Initial Placement. As a result, the Company adjusted the warrants to provide for the right to purchase additional common shares in the amount of 1,721,000 shares on September 20, 2007, and 279,000 shares on November 20, 2007.
(v) On December 12, 2007 the Company completed its initial public offering ("IPO") issuing a total of 18,821,000 common shares. The shares were issued at CAD $0.80 or USD $0.7926 raising funds of USD $14,916 less issuance costs of USD $3,484 that have been netted against the offering. In connection with the IPO, the Company issued 700,000 Broker Warrants to the agents as partial consideration for their services rendered in connection with the IPO. Each Broker Warrant entitles the holder to purchase one common share at a price of CAD $0.80 until December 12, 2009. The Company ascribed USD $0.385 per warrant to each of the Broker Warrants. No Broker Warrants have been exercised at December 31, 2007.
(e) Acquisition of Caza Petroleum:
Share Exchange and Shareholders Agreement
Prior to the consummation of the Initial Placement the Company became a party to a Share Exchange and Shareholders Agreement with Caza Petroleum and the management of Caza Petroleum and their respective spouses. Under the agreement management are not permitted to transfer their shares of Caza Petroleum (other than among themselves and family members), except to the Company under certain conditions. Management has the right at any time to exchange their Caza Petroleum shares for common shares of the Company on the basis of 2,800 common shares for each Caza Petroleum share, subject to adjustment in certain events. In addition, the Company has the right to cause each manager to exchange his Caza Petroleum shares for common shares in certain circumstances, including a change of control, liquidation, sale of substantially all of the assets, or bankruptcy of the Company, or the divorce, death or incapacity of the manager or a breach of the agreement.
(f) Stock options
The Company granted stock options to its directors, officers and employees under its stock option plan dated January 31, 2007, and as amended and restated dated October 10, 2007. The maximum number of common shares for which options may be granted, together with shares issuable under any other share compensation arrangement of the Company, is limited to 10% of the total number of outstanding common shares at the time of grant of any option. For this determination, outstanding common shares include common shares issuable in exchange for Caza Petroleum shares under the Share Exchange and Shareholders Agreement. At December 31, 2007, the maximum number of shares issuable under the stock option plan was 9,582,100. The exercise price of each option may not be less than the fair market value of the Company's common shares on the date of grant. Except as otherwise determined by the Board and subject to the limitation that the stock options may not be exercised later than the expiry date provided in the relevant option agreement but in no event later than 10 years (or such shorter period required by an exchange) from their date of grant, options cease to be exercisable: (i) immediately upon a participant's termination by the Company for cause, (ii) 90 days (30 days in the case of a participant engaged in investor relations activities) after a participant's termination from the Company for any other reason except death and (iii) one year after a participant's death. Subject to the Board's sole discretion in modifying the vesting of stock options, stock options will vest, and become exercisable, as to 33?% on the first anniversary of the date of grant and 33?% on each subsequent anniversary of the date of grant. All options granted to a participant but not yet vested will vest immediately upon a change of control (as defined in the stock option plan) or upon the Company's termination of a participant's employment without cause.
2007
Weighted
average
Number of Exercise
Stock Options options price
----------------------------------------------------
Beginning of year - -
Granted 6,605,000 $ 0.6159
Exercised - -
Forfeited - -
---------------------------
End of year 6,605,000 $ 0.6159
---------------------------
---------------------------
Weighted
Average
Remain-
ing Number
Number Contrac- Exercisable
Date of Outstand- Exercise tual Date of December 31,
Grant ing Price Life Expiry 2007
--------------------------------------------------------------------------
January 31,
2007 3,325,000 0.50 9.09 January 31, 2017 1,108,333
February 5,
2007 400,000 0.50 9.10 February 5, 2017 -
May 10, 2007 220,000 0.50 9.34 May 10, 2017 -
June 11, 2007 20,000 0.50 9.45 June 11, 2017 -
December 12,
2007 2,640,000 0.79 9.95 December 12, 2017 -
--------------------------------------------------------------------------
6,605,000 9.45 1,108,333
--------------------------------------------------------------------------
In 2007, the weighted average fair market value per option of $0.359 was estimated using the Black-Scholes option pricing model with the following assumptions:
2007
----------
Dividend yield Nil
Expected volatility 88.16%
Risk free rate of return 4.00-4.75%
Weighted average life 3 years
(g) Escrowed securities
In accordance with the policies of the TSX, a total of 20,457,500 exchangeable shares were held pursuant to escrow agreements. In addition 25,200,000 shares of non-management common shares have been held pursuant to the escrow agreements. One-third of the escrowed shares are to be released six months after the date of listing on the TSX of December 12, 2007. One-half of the escrowed shares remaining in escrow are to be released twelve months after the date of listing on the TSX. All remaining shares then remaining in escrow will be released eighteen months after the date of listing on the TSX.
(h) Contributed surplus
The following table presents the changes in contributed surplus:
2007 2006
-------------------------------------------------------------------------
Balance, beginning of period $ 2,250 $ Nil
Founder shares (Note 6c) - 2,250
Stock based compensation 537 -
-------------------------------------------------------------------------
Balance, end of period $ 2,787 $ 2,250
-------------------------------------------------------------------------
7. Related Party Transactions
The aggregate amount of expenditures made to related parties:
(a) The Vice President, Exploration of Caza Petroleum, prior to becoming an employee, was a consultant to Caza Petroleum and as a consultant was eligible to receive a 2% carried working interest (subject to proportionate reduction based on the Company's working interest) to casing point in the initial test well in certain prospects. The applicable prospects are the Bongo, Puku, Eland and Sable properties. Since becoming an employee this individual is no longer eligible to participate for additional interests beyond those described.
(b) In March 2007, Caza Petroleum entered into a farmout agreement with Singular Oil & Gas Sands, LLC ("Singular") to participant in the drilling of the Matthys-McMillan well in Wharton County, Texas. Under the terms of that agreement, Singular paid 15.67% of the drilling costs to casing point of the Matthys-McMillan well to earn a 14.01% interest in the property thereafter. This participation was in the normal course of Caza's business and on the same terms and conditions to those of other joint venture partners. Singular is a related party as it is a company under common control with Sercor Limited, which is a significant shareholder of Caza.
(c) Interest of $7 was paid to an officer in 2006 for money advanced to the Company. The advanced funds were repaid during 2006.
All related party transactions are in the normal course of operations and have been measured at the agreed to exchange amounts, which is the amount of consideration established and agreed to by the related parties and which is comparable to those negotiated with third parties.
8. Commitments and Contingencies
(a) As of December 31, 2007, the Company is committed under operating leases for its offices and corporate apartment. The Company is committed to the following aggregate minimum lease payments which are shown below:
-----------------------------
($'000's)
-----------------------------
2008 222
2009 169
(b) The Company received $2,565 in 2004, 2005 and 2006 under an agreement whereby the funds received are only repayable from production from three wells on the Aldwell Ranch project at a rate of 47.281% of 100% of the revenues until repayment of the project financing and 40.787% of 100% of the revenues thereafter. The repayment obligation ceases upon ninety percent (90%) of the then current estimated recoverable reserves being produced. This has been accounted for as a net profits interest and has reduced the carrying amount of the full cost center.
9. Supplementary Information
(a) net change in non-cash working capital
($'000's) 2007 2006
----------------------------------------------------------------
Provided by (used in)
--------------------
Accounts receivable (1,116) (1,006)
Prepaid and other (211) (101)
Accounts payable and accrued liabilities 2,706 2,600
----------------
1,379 1,493
----------------
----------------
Summary of changes
Operating (760) 165
Financing 837 -
Investing 1,302 1,328
----------------
1,379 1,493
----------------
----------------
(b) supplementary cash flow information
($'000's) 2007 2006
----------------------------------------------------------------
Interest paid 37 29
Interest received 455 192
Cash taxes paid 34 -
(c) cash and cash equivalents
($'000's) 2007 2006
----------------------------------------------------------------
Cash on deposit 4,238 195
Money market instruments 8,957 13,502
----------------
Cash and cash equivalents 13,195 13,697
----------------
----------------
The money market instruments bear interest at a rate of 4.819% as at December 31, 2007 (December 31, 2006 - 5.19%)
10. Financial Instruments
As disclosed in Note 2(b), the Company holds various forms of financial instruments. The nature of these instruments and the Company's operations expose the Company to commodity price, credit, and foreign exchange risks. The Company manages its exposure to these risks by operating in a manner that minimizes its exposure to the extent practical.
(a) Commodity price risk
The Company is subject to commodity price risk for the sale of natural gas. The Company may enter into contracts for risk management purposes only, in order to protect a portion of its future cash flow from the volatility of natural gas commodity prices.
(b) Credit Risk
A substantial portion of the Company's accounts receivable are with customers and joint-venture participants in the oil and natural gas industry and are subject to normal industry credit risks. The carrying amount of accounts receivable reflects management's assessment of the credit risk associated with these customers and participants. The Company's oil and natural gas production is sold to large marketing companies. Typically, the Company's maximum credit exposure to customers is revenue from two months of sales. During the year ended December 31, 2007, the Company sold 95.47% (2006 - 80.24%) of its natural gas and condensate production to a single purchaser. These sales were conducted on transaction terms that are typical for the sale of natural gas and condensate in the United States. At December 31, 2007, the accounts receivable from sales of production represented approximately 18% of the Company's accounts receivable. At December 31, 2007, one of the Company's joint venture partners represented approximately 26% of the Company's accounts receivable and two of the Company's joint venture partners represented approximately 37% of the Company's accounts receivable.
(c) Foreign Currency Exchange Risk
The Company is exposed to foreign currency exchange fluctuations, as certain general and administrative expenses are or will be denominated in Canadian dollars and United Kingdom pounds sterling. The Company's sales of oil and natural gas are all transacted in US dollars.
(d) Fair Value of Financial Instruments
The Company has determined that the fair values of the financial instruments consisting of cash and cash equivalents, accounts receivable and accounts payable are not materially different from the carrying values of such instruments reported on the balance sheet due to their short-term nature.
Annual Report and AGM
The annual report will be available on the Company's website, www.cazapetro.com, and posted to shareholders shortly. The annual report will be accompanied by an information circular and a notice of the annual general meeting of the company which will be held at 10:00a.m. on or about May 27, 2008 at the Woodlands Waterway Marriott, located at 1601 Lake Robbins Drive, The Woodlands, Texas.
The Toronto Stock Exchange has neither approved nor disapproved the information contained herein.
For more information, please contact
Caza Oil & Gas, Inc.John McGoldrick
Executive Chairman
(281) 363-4442
Email: jmcgoldrick@cazapetro.com
Website: www.cazapetro.com
or
Noble & Company Limited
Nick Naylor / Jamie Boyd
Nominated Adviser and Joint Broker
+44 (0) 20 7763 2200
or
Aquila Financial Ltd.
Peter Reilly
Financial Public Relations Advisers
+44 (0) 20 7202 2601