ARROW EXPLORATION CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS THREE MONTHS ENDED MARCH 31, 2024
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") as provided by the management of Arrow Exploration Corp. ("Arrow" or the "Company"), is dated as of May 29, 2024 and should be read in conjunction with Arrow's interim condensed (unaudited) consolidated financial statements and related notes as at and for the three months ended March 31, 2024 and 2023. Additional information relating to Arrow, including its annual consolidated financial statements and related notes for the year ended December 31, 2023 and 2022 (the "Annual Financial Statements"), is available under Arrow's profile on www.sedar.com.
Advisories
Basis of Presentation
The condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"), and all amounts herein are expressed in United States dollars, unless otherwise noted, and all tabular amounts are expressed in United States dollars, unless otherwise noted. Additional information for the Company may be found on SEDAR at www.sedar.com.
Advisory Regarding Forward‐Looking Statements
This MD&A contains certain statements or disclosures relating to Arrow that are based on the expectations of its management as well as assumptions made by and information currently available to Arrow which may constitute forward- looking statements or information ("forward-looking statements") under applicable securities laws. All such statements and disclosures, other than those of historical fact, which address activities, events, outcomes, results or developments that Arrow anticipates or expects may, could or will occur in the future (in whole or in part) should be considered forward-looking statements. In some cases, forward-looking statements can be identified by the use of the words "believe", "continue", "could", "expect", "likely", "may", "outlook", "plan", "potential", "will", "would" and similar expressions. In particular, but without limiting the foregoing, this MD&A contains forward-looking statements pertaining to the following: the COVID-19 pandemic and its impact; tax liability; capital management strategy; capital structure; credit facilities and other debt; performance by Canacol (as defined herein) and the Company in connection with the Note (as defined herein) and letters of credit; Arrow's costless collar structure;; cost reduction initiatives; potential drilling on the Tapir block; capital requirements; expenditures associated with asset retirement obligations; future drilling activity and the development of the Rio Cravo Este structure on the Tapir Block. Statements relating to "reserves" and "resources" are deemed to be forward-looking information, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves and resources described exist in the quantities predicted or estimated and can be profitably produced in the future.
The forward-looking statements contained in this MD&A reflect several material factors and expectations and assumptions of Arrow including, without limitation: current and anticipated commodity prices and royalty regimes; the impact of the COVID-19 pandemic; the financial impact of Arrow's costless collar structure; availability of skilled labour; timing and amount of capital expenditures; future exchange rates; commodity prices; the impact of increasing competition; general economic conditions; availability of drilling and related equipment; receipt of partner, regulatory and community approvals; royalty rates; changes in income tax laws or changes in tax laws and incentive programs; future operating costs; effects of regulation by governmental agencies; uninterrupted access to areas of Arrow's operations and infrastructure; recoverability of reserves; future production rates; timing of drilling and completion of wells; pipeline capacity; that Arrow will have sufficient cash flow, debt or equity sources or other financial resources required to fund its capital and operating expenditures and requirements as needed; that Arrow's conduct and results of operations will be consistent with its expectations; that Arrow will have the ability to develop its oil and gas properties in the manner currently contemplated; current or, where applicable, proposed industry conditions, laws and regulations will continue in effect or as anticipated; that the estimates of Arrow's
Q1 2024 MD&A | 1 |
reserves and production volumes and the assumptions related thereto (including commodity prices and development costs) are accurate in all material respects; that Arrow will be able to obtain contract extensions or fulfil the contractual obligations required to retain its rights to explore, develop and exploit any of its undeveloped properties; and other matters.
Arrow believes the material factors, expectations and assumptions reflected in the forward-looking statements are reasonable at this time but no assurance can be given that these factors, expectations and assumptions will prove to be correct. The forward-looking statements included in this MD&A are not guarantees of future performance and should not be unduly relied upon.
Such forward-looking 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 including, without limitation: the impact of general economic conditions; volatility in commodity prices; industry conditions including changes in laws and regulations including adoption of new environmental laws and regulations, and changes in how they are interpreted and enforced; competition; lack of availability of qualified personnel; the results of exploration and development drilling and related activities; obtaining required approvals of regulatory authorities; counterparty risk; risks associated with negotiating with foreign governments as well as country risk associated with conducting international activities; commodity price volatility; fluctuations in foreign exchange or interest rates; environmental risks; changes in income tax laws or changes in tax laws and incentive programs; changes to pipeline capacity; ability to secure a credit facility; ability to access sufficient capital from internal and external sources; risk that Arrow's evaluation of its existing portfolio of development and exploration opportunities is not consistent with future results; that production may not necessarily be indicative of long term performance or of ultimate recovery; and certain other risks detailed from time to time in Arrow's public disclosure documents including, without limitation, those risks identified in Arrow's 2018 AIF, a copy of which is available on Arrow's SEDAR profile at www.sedar.com. Readers are cautioned that the foregoing list of factors is not exhaustive and are cautioned not to place undue reliance on these forward-looking statements.
Non‐IFRS Measures
The Company uses non-IFRS measures to evaluate its performance which are measures not defined in IFRS. Working capital, funds flow from operations, realized prices, operating netback, adjusted EBITDA, and net debt as presented do not have any standardized meaning prescribed by IFRS and therefore may not be comparable with the calculation of similar measures for other entities. The Company considers these measures as key measures to demonstrate its ability to generate the cash flow necessary to fund future growth through capital investment, and to repay its debt, as the case may be. These measures should not be considered as an alternative to, or more meaningful than net income or cash provided by (used in) operating activities or net income and comprehensive income as determined in accordance with IFRS as an indicator of the Company's performance. The Company's determination of these measures may not be comparable to that reported by other companies.
Adjusted working capital is calculated as current assets minus current liabilities, excluding non-cash liabilities; funds from operations is calculated as cash flows provided by operating activities adjusted to exclude changes in non-cash working capital balances; realized price is calculated by dividing gross revenue by gross production, by product, in the applicable period; operating netback is calculated as total natural gas and crude revenues minus royalties, transportation costs and operating expenditures; adjusted EBITDA is calculated as net income adjusted for interest, income taxes, depreciation, depletion, amortization and other similar non-recurring or non-cash charges; and net debt (net cash) is defined as the principal amount of its outstanding debt, less working capital items excluding non-cash liabilities.
The Company also presents funds from operations per share, whereby per share amounts are calculated using weighted- average shares outstanding consistent with the calculation of net income per share.
A reconciliation of the non-IFRS measures is included as follows:
Q1 2024 MD&A | 2 |
Three months | Three months | |
ended March 31, | ended March 31, | |
(in United States dollars) | 2024 | 2023 |
Net income | 3,176,727 | 2,989,735 |
Add/(subtract): | ||
Share based payments | 101,278 | 132,240 |
Financing costs: | ||
Accretion on decommissioning obligations | 37,376 | 29,156 |
Interest | 9,769 | 60,887 |
Other | 199,065 | 45,682 |
Depreciation and depletion | 3,531,772 | 2,454,364 |
Derivative loss | - | (1,354,275) |
Income tax expense | 2,965,152 | - |
Adjusted EBITDA (1) | 10,021,139 | 4,357,790 |
Cash flows provided by operating activities | 8,582,288 | 2,380,195 |
Minus - Changes in non-cash working capital balances: | ||
Trade and other receivables | (299,554) | (1,704,944) |
Restricted cash | (343,746) | 12,266 |
Taxes receivable | 164,078 | 602,369 |
Deposits and prepaid expenses | 152,963 | 113,612 |
Inventory | (92) | 117,798 |
Accounts payable and accrued liabilities | 297,211 | 2,482,665 |
Income tax payable | (1,342,465) | 236,642 |
Funds flow from operations (1) | 7,210,683 | 4,240,603 |
(1)Non-IFRS measures
The term barrel of oil equivalent ("boe") is used in this MD&A. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 thousand cubic feet ("Mcf") of natural gas to one barrel of oil ("bbl") is used in the MD&A. This conversion ratio of 6:1 is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Q1 2024 MD&A | 3 |
FINANCIAL AND OPERATING HIGHLIGHTS
Three months | Three months | |
ended March 31, | ended March 31, | |
(in United States dollars, except as otherwise noted) | 2024 | 2023 |
Total natural gas and crude oil revenues, net of royalties | 14,404,921 | 6,992,860 |
Funds flow from operations (1) | 7,210,683 | 4,240,603 |
Funds flow from operations (1) per share - | ||
Basic($) | 0.02 | |
0.03 | ||
Diluted ($) | 0.02 | 0.01 |
Net income | 3,176,727 | 2,989,735 |
Net income per share - | ||
Basic ($) | 0.01 | 0.01 |
Diluted ($) | 0.01 | 0.01 |
Adjusted EBITDA (1) | 10,021,139 | 4,271,726 |
Weighted average shares outstanding - | ||
Basic ($) | 285,864,348 | 222,717,847 |
Diluted ($) | 292,791,385 | 288,639,348 |
Common shares end of period | 285,864,348 | 228,979,841 |
Capital expenditures | 6,281,328 | 4,271,693 |
Cash and cash equivalents | 11,606,342 | 12,354,424 |
Current Assets | 20,779,081 | 15,849,150 |
Current liabilities | 11,258,252 | 13,315,499 |
Adjusted working capital (1) | 9,520,829 | 9,325,680 |
Long-term portion of restricted cash (2) | 237,814 | 831,048 |
Total assets | 64,579,940 | 53,719,944 |
Operating | ||
Natural gas and crude oil production, before royalties | ||
Natural gas (Mcf/d) | 4,221 | |
1,760 | ||
Natural gas liquids (bbl/d) | 4 | 6 |
Crude oil (bbl/d) | 2,432 | 434 |
Total (boe/d) | 2,730 | 1,144 |
Operating netbacks ($/boe) (1) | ||
Natural gas ($/Mcf) | ($0.14) | $0.73 |
Crude oil ($/bbl) | $56.27 | $48.94 |
Total ($/boe) | $50.10 | $20.16 |
(1)Non-IFRS measures - see "Non-IFRS Measures" section within this MD&A
(2)Long term restricted cash not included in working capital
Q1 2024 MD&A | 4 |
The Company
Arrow is a junior oil and gas company engaged in the acquisition, exploration and development of oil and gas properties in Colombia and Western Canada. The Company's shares trade on the TSX Venture Exchange and the London AIM exchange under the symbol AXL.
The Company and Arrow Exploration Ltd. entered into an arrangement agreement dated June 1, 2018, as amended, whereby the parties completed a business combination pursuant to a plan of arrangement under the Business Corporations Act (Alberta) ("ABCA") on September 28, 2018. Arrow Exploration Ltd. and Front Range's then wholly-owned subsidiary, 2118295 Alberta Ltd., were amalgamated to form Arrow Holdings Ltd., a wholly-owned subsidiary of the Company (the "Arrangement"). On May 31, 2018, Arrow Exploration Ltd. entered in a share purchase agreement, as amended, with Canacol Energy Ltd. ("Canacol"), to acquire Canacol's Colombian oil properties held by its wholly-owned subsidiary Carrao Energy S.A. ("Carrao"). On September 27, 2018, Arrow Exploration Ltd. closed the agreement with Canacol.
On May 31, 2018, Arrow Exploration Ltd., entered into a purchase and sale agreement to acquire a 50% beneficial interest in a contract entered into with Ecopetrol S.A. pertaining to the exploration and production of hydrocarbons in the Tapir block from Samaria Exploration & Production S.A. ("Samaria"). On September 27, 2018, Arrow Exploration Ltd. closed the agreement with Samaria. As at December 31, 2023 the Company held an interest in four oil blocks in Colombia and oil and natural gas leases in five areas in Canada as follows:
Gross Acres | Working Interest | Net Acres | ||
COLOMBIA | ||||
Tapir | Operated1 | 65,125 | 50% | 32,563 |
Oso Pardo | Operated | 672 | 100% | 672 |
Ombu | Non-operated | 56,482 | 10% | 5,648 |
COR-39 | Operated | 95,111 | 100% | 95,111 |
Total Colombia | 217,390 | 133,994 | ||
CANADA | ||||
Ansell | Operated | 640 | 100% | 640 |
Fir | Non operated | 7,680 | 32% | 2,458 |
Penhold | Non-operated | 480 | 13% | 61 |
Pepper | Operated | 19,200 | 100% | 19,200 |
Wapiti | Non-operated | 1,280 | 13% | 160 |
Total Canada | 29,280 | 22,519 | ||
TOTAL | 246,670 | 156,513 | ||
The Company's primary producing assets are located in Colombia in the Tapir, Oso Pardo and Ombu blocks, with natural gas production in Canada at Fir and Pepper, Alberta.
Q1 2024 MD&A | 5 |
Llanos Basin
Within the Llanos Basin, the Company is engaged in the exploration, development and production of oil within the Tapir block. In the Llanos Basin most oil accumulations are associated with three-way dip closure against NNE-SSW trending normal faults and can have pay within multiple reservoirs. The Tapir block contain large areas not yet covered by 3D seismic, and in Management's opinion offer substantial exploration upside.
1The Company's interest in the Tapir block is held through a private contract with Petrolco, who holds a 50% participating interest in, and is the named operator of, the Tapir contract with Ecopetrol. The formal assignment to the Company is subject to Ecopetrol's consent. The Company is the de facto operator pursuant to certain agreements with Petrolco (details of which are set out in Paragraph 16.13 of the Company's AIM Admission Document dated October 20, 2021).
Middle Magdalena Valley ("MMV") Basin
Oso Pardo Field
The Oso Pardo Field is located in the Santa Isabel Block in the MMV Basin. It is a 100% owned property operated by the Company. The Oso Pardo field is located within a Production Licence covering 672 acres. Three wells have been drilled to date within the licensed area.
Ombu E&P Contract - Capella Conventional Heavy Oil Discovery
The Caguan Basin covers an area of approximately 60,000 km2 and lies between the Putumayo and Llanos Basins. The primary reservoir target is the Upper Eocene aged Mirador formation. The Capella structure is a large, elongated northeast- southwest fault-related anticline, with approximately 17,500 acres in closure at the Mirador level. The field is located approximately 250 km away from the nearest offloading station at Neiva, where production from Capella is trucked.
The Capella No. 1 discovery well was drilled in July 2008 and was followed by a series of development wells. The Company earned a 10% working interest in the Ombu E&P Contract by paying 100% of all activities associated with the drilling, completion, and testing of the Capella No. 1 well. The Capella field is currently suspended and temporarily shut in.
Fir, Alberta
The Company has an average non-operated 32% WI in 12 gross (3.84 net) sections of oil and natural gas rights and 17 gross (4.5 net) producing natural gas wells at Fir. The wells produce raw natural gas into the Cecilia natural gas plant where it is processed.
Pepper, Alberta
The Company holds a 100% operated WI in 37 sections of Montney P&NG rights on its Pepper asset in West Central Alberta. The 6-26-53-23W5M Montney gas well (West Pepper) is tied into the Galloway gas plant for processing. The 3-21-52- 22W5M Montney gas well (East Pepper) is currently tied into the Sundance gas plant for processing. The majority of lands have tenure extending into 2025.
Three Months Ended March 31, 2024 Financial and Operational Highlights
- Arrow recorded $14,404,921 in revenues, net of royalties, on crude oil sales of 219,160 bbls, 395 bbls of natural gas liquids ("NGL's") and 160,119 Mcf of natural gas sales;
- Funds flow from operations of $7,210,683;
- Net income of $3,176,727 and adjusted EBITDA was $10,021,139;
- Drilled four development wells at its Carrizales Norte field
Q1 2024 MD&A | 6 |
RESULTS OF OPERATIONS
The Company increased its production from new wells at both Rio Cravo Este and Carrizales Norte fields in the Tapir block. These have allowed the Company to continue to improve its operating results and EBITDA. There has also been a decrease in the Company's natural gas production in Canada due to natural declines.
Average Production by Property
Average Production Boe/d | Q1 2024 | Q4 2023 | Q3 2023 | Q2 2023 | Q1 2023 | Q4 2022 |
Oso Pardo | 166 | 80 | 93 | 130 | 138 | 115 |
Ombu (Capella) | - | - | - | - | 80 | 238 |
Rio Cravo Este (Tapir) | 1,644 | 1,326 | 1,443 | 1,592 | 1,004 | 832 |
Carrizales Norte (Tapir) | 622 | 621 | 642 | 57 | - | - |
Total Colombia | 2,432 | 2,027 | 2,178 | 1,779 | 1,222 | 1,185 |
Fir, Alberta | 78 | 80 | 81 | 77 | 74 | 79 |
Pepper, Alberta | 220 | 228 | 259 | 313 | 340 | 472 |
TOTAL (Boe/d) | 2,730 | 2,335 | 2,518 | 2,169 | 1,635 | 1,736 |
The Company's average production for the three months ended March 31, 2024 was 2,730 boe/d, which consisted of crude oil production in Colombia of 2,432 bbl/d, natural gas production of 1,760 Mcf/d, and minor amounts of natural gas liquids from the Company's Canadian properties. The Company's Q1 2024 production was 17% higher than its Q4 2023 production and 67% higher when compared to Q1 2023.
Average Daily Natural Gas and Oil Production and Sales Volumes
Three months ended
March 31
2024 | 2023 | |
Natural Gas (Mcf/d) | ||
Natural gas production | 1,760 | 2,459 |
Natural gas sales | 1,760 | 2,459 |
Realized Contractual Natural Gas Sales | 1,760 | 2,459 |
Crude Oil (bbl/d) | ||
Crude oil production | 2,432 | 1,222 |
Inventory movements and other | 3 | (89) |
Crude Oil Sales | 2,435 | 1,133 |
Corporate | ||
Natural gas production (boe/d) | 294 | 410 |
Natural gas liquids(bbl/d) | 4 | 4 |
Crude oil production (bbl/d) | 2,432 | 1,222 |
Total production (boe/d) | 2,730 | 1,635 |
Inventory movements and other (boe/d) | 3 | (89) |
Total Corporate Sales (boe/d) | 2,733 | 1,546 |
Q1 2024 MD&A | 7 |
During the three months ended March 31, 2024 the majority of production was attributed to Colombia, where most of Company's blocks were producing. In Canada, the Company has two operated and two non-operated properties located in the province of Alberta at Fir, Pepper, Harley and Wapiti.
Natural Gas and Oil Revenues
Three months ended
March 31
2024 | 2023 | |||
Natural Gas | ||||
Natural gas revenues | $ | 300,224 | $ | 467,876 |
NGL revenues | 26,127 | 23,145 | ||
Royalties | (16,342) | (42,964) | ||
Revenues, net of royalties | 310,009 | 448,057 | ||
Oil | ||||
Oil revenues | $ | 16,067,291 | $ | 7,473,836 |
Royalties | (1,972,379) | (929,033) | ||
Revenues, net of royalties | 14,094,912 | 6,544,803 | ||
Corporate | ||||
Natural gas revenues | $ | 300,224 | $ | 467,876 |
NGL revenues | 26,127 | 23,145 | ||
Oil revenues | 16,067,291 | 7,473,836 | ||
Total revenues | 16,393,642 | 7,964,857 | ||
Royalties | (1,988,721) | (971,997) | ||
Natural gas and crude oil revenues, net of royalties, as reported | $ | 14,404,921 | $ | 6,992,860 |
Natural gas and crude oil revenues, net of royalties, for the three months ended March 31, 2024 was $14,404,921 (2023: $6,992,860) which represents an increase of 106% when compared to the same 2023 period, and 7% higher than Q4 2023. These significant increases are mainly due to increased oil production in Colombia, offset by decrease in revenue in Canada.
Average Benchmark and Realized Prices
Three months ended March 31 | |||||
2024 | 2023 | Change | |||
Benchmark Prices | |||||
AECO ($/Mcf) | $2.55 | $3.28 | (22%) | ||
Brent ($/bbl) | $84.67 | $79.21 | 7% | ||
West Texas Intermediate ($/bbl) | $76.95 | $76.10 | 1% | ||
Realized Prices | |||||
Natural gas, net of transportation ($/Mcf) | $1.87 | $2.11 | (11%) | ||
Natural gas liquids ($/bbl) | $66.20 | $66.13 | 0% | ||
Crude oil, net of transportation ($/bbl) | $73.31 | $73.31 | 0% | ||
Corporate average, net of transport ($/boe) | $66.58 | $57.23 | 16% | ||
(1)Non-IFRS measure | |||||
Q1 2024 MD&A | 8 |
The Company realized prices of $66.58 per boe during the three months ended March 31, 2024 (2023: $57.23) due to small increases in oil prices during 2024, except for natural gas prices which decreased during this period.
Operating Expenses
Three months ended | |||
March 31 | |||
2024 | 2023 | ||
Natural gas & NGL's | 306,224 | 517,653 | |
Crude oil | 1,762,787 | 599,937 | |
Total operating expenses | 2,069,011 | 1,117,590 | |
Natural gas ($/Mcf) | $1.91 | $2.34 | |
Crude oil ($/bbl) | $8.04 | $5.88 | |
Corporate ($/boe)(1) | $8.40 | $8.03 |
(1)Non-IFRS measure
During the three months ended March 31, 2024, Arrow incurred in operating expenses of $2,069,011 (2023: $1,117,590). This increase is mainly due to increase in production in the Company's Carrizales Norte field in the Tapir block and higher costs of producing heavier oil. The Company's corporate operating expense of $8.40 per boe (2023: $8.03) which is slightly higher than Q1 2023.
Operating Netbacks
Three months ended | ||||
March 31 | ||||
2024 | 2023 | |||
Natural Gas ($/Mcf) | ||||
Revenue, net of transportation expense | $1.87 | $2.11 | ||
Royalties | ($0.10) | (0.19) | ||
Operating expenses | ($1.91) | (2.34) | ||
Natural gas operating netback(1) | ($0.14) | ($0.42) | ||
Crude oil ($/bbl) | ||||
Revenue, net of transportation expense | $73.31 | $73.31 | ||
Royalties | ($9.00) | (9.11) | ||
Operating expenses | (5.88) | |||
($8.04) | ||||
Crude oil operating netback(1) | $56.27 | $58.31 | ||
Corporate ($/boe) | ||||
Revenue, net of transportation expense | $66.58 | $57.23 | ||
Royalties | ($8.08) | (6.98) | ||
Operating expenses | ($8.40) | (8.03) | ||
Corporate operating netback(1) | $50.10 | $42.21 | ||
(1)Non-IFRS measure |
The operating netbacks of the Company continued within healthy levels during 2024 due increasing production from its Colombian assets and improved crude oil prices, which were offset by decreases in natural gas prices.
Q1 2024 MD&A | 9 |
Attachments
- Original Link
- Original Document
- Permalink
Disclaimer
Arrow Exploration Corp. published this content on 30 May 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 30 May 2024 18:23:10 UTC.