REG - Arrow Exploration - 2022 ANNUAL RESULTS, MD&A AND RESERVES REPORT
02/05/2023 07:00
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RNS Number : 9821X Arrow Exploration Corp. 02 May 2023
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JURISDICTION.
ARROW ANNOUNCES 2022 AUDITED YEAR END AND Q4 2022 RESULTS, FILING OF AUDITED
FINANCIAL STATEMENTS, MD&A AND RESERVES REPORT
CALGARY, May 2, 2023 - Arrow Exploration Corp. (AIM: AXL; TSXV: AXL) ("Arrow"
or the "Company") the high-growth operator with a portfolio of assets across
key Colombian hydrocarbon basins, announces the filing of its Annual Audited
Financial Statements and Management's Discussion and Analysis ("MD&A") for
the quarter and year ended December 31, 2022 and the filing of its 2022
year-end reserves report, which are available on SEDAR (www.sedar.com
(http://www.sedar.com) ) and will also shortly be available on Arrow's website
at www.arrowexploration.ca (http://www.arrowexploration.ca) .
Full Year Highlights:
· Recorded $25 million of total oil and natural gas revenue, net of
royalties (FY 2021: $6.5 million).
· Generated record results from operations and an increase in
production since its listing on AIM in October 2021:
o FY 2022 EBITDA of $12.5 million (FY 2021: $0.8 million), with Q4 2022
EBITDA of $4.5 million compared to $0.5 million in Q4 2021.
o FY 2022 average corporate production up 223% to 1,345 boe/d (FY 2021: 461
boe/d) with Q4 average corporate production of 1,736 boe/d compared to Q4 2021
140 boe/d and Q3 2022 1,503 boe/d.
· Realized FY 2022 corporate operating netbacks of $42.40/boe, and
$41.95/boe in Q4 2022, due in each case to increased production and better
prices of crude oil.
· Cash position of $13 million at the end of 2022.
· Generated positive operating cashflows in Q4 2022 of $7.5 million.
· Proven and probable reserves at year-end 2022 increased 4% to 7.69
MMboe; representing a reserve replacement ratio of 164%.
· Drilled two successful wells at Rio Cravo Este (RCE) resulting in
material production addittions. Successfully completed two workovers in the
RCE-1 and RCS-1 wells at Rio Cravo. These operations targeted additional
hydrocarbon bearing zones which resulted in material production additions.
· The East Pepper Montney gas well was tied in adding to Canadian
production. This resulted in reserve reclassification and displays the
commercial viability of drilling and completing Montney gas wells in the
Hinton Area, all of which were part of the 2022 capital program.
· All operations delivered safely, with no accidents or environmental
incidents.
Post Period End Highlights:
· So far in 2023, the Company has drilled three development wells on
the Tapir Block, including RCE-5, RCE-4 and RCE-3, which are all currently
producing at restricted rates. Ramping production up slowly prevents early
water breakthrough in each Rio Cravo well.
· The 130 square kilometer 3D seismic at West Tapir has completed and
is in the hands of processors. It will take three to four weeks to refine the
data and likely another two to three weeks to complete data interpretation.
This is one of the larger 3-D surveys done in the last few years in the Llanos
Basin. Our 2-D data set has identified a number of prospective structures. The
3-D shoot will refine these to prospect status and provide drilling running
room for the next one to two years.
Outlook
· Arrow has a fully funded 2023 work program totaling US$32 million
targeting 10 wells. The three final Carbonera-7 (C7)wells at RCE have been
completed and are being ramped up slowly to manage the reservoir.
· The first Carrizales Norte well will spud shortly. Arrow then
anticipates an additional two wells to be drilled at Carrizales Norte by
year-end.
· Arrow will then mobilize back to the RCE pad to drill at least 2
wells targeting the Gacheta formation which was successfully tested at
commercial rates in RCE 2.
· Arrow also plans to drill 2 development wells at the Oso Pardo Block
in the Middle Magdalena Basin.
Marshall Abbott, CEO of Arrow Exploration Corp., commented:
"2022 was a fantastic year all around for the Company. We saw growth in
production, revenue and income and our balance sheet is in a very healthy
position to support the large capital program planned for 2023. Looking
ahead, Arrow has multiple near-term catalysts capable of delivering material
value. Currently, Arrow is ready to spud the first well at Carrizales Norte
which could have a significant impact on the Company in both production and
reserves as well as establishing a new core area. The 3D seismic West Tapir
project has now completed shooting and is currently being processed and is
expected to further evaluate 2D recognized fault prospects. Looking further
ahead, in 2024 the Company is planning a second 3D project on the east side of
the Tapir block to evaluate other 2D recognized prospects. The Arrow team
continues to strive towards excellence and increasing shareholder value."
FINANCIAL AND OPERATING HIGHLIGHTS
Three months ended December 31, 2022 Year ended December 31, 2022 Three months ended December 31, 2021 Year ended December 31, 2021
(in United States dollars, except as otherwise noted)
Total natural gas and crude oil revenues, net of royalties 8,931,562 24,973,464 3,038,832 6,512,493
Funds flow from (used in) operations ((1)) 1,960,289 9,493,208 (403,007) (145,503)
Funds flow from (used in) operations ((1)) per share -
Basic($) 0.01 0.04 (0.00) (0.00)
Diluted ($) 0.01 0.03 (0.00) (0.00)
Net income 2,968,117 346,524 6,960,035 5,693,532
Net income per share -
Basic ($) 0.02 0.00 0.04 0.06
Diluted ($) 0.01 0.00 0.04 0.06
Adjusted EBITDA ((1)) 4,456,757 12,493,099 540,642 804,674
Weighted average shares outstanding:
Basic 217,784,100 215,468,129 171,345,885 94,553,391
Diluted 288,239,348 279,288,480 173,035,572 96,243,078
Common shares end of period 218,401,931 218,401,931 213,389,623 213,389,623
Capital expenditures 2,106,463 7,668,988 1,991,163 2,221,643
Cash and cash equivalents 13,060,968 13,060,968 10,878,508 10,878,508
Current assets 17,504,225 17,504,225 12,806,502 12,806,502
Current liabilities 18,820,890 18,820,890 4,800,428 4,800,428
Adjusted working capital((1)) 8,223,758 8,223,758 8,006,074 8,006,074
Long-term portion of restricted cash and deposits((2)) 608,127 608,127 - -
Total assets 53,190,248 53,190,248 41,195,798 41,195,798
Operating
Natural gas and crude oil production, before royalties
Natural gas (Mcf/d) 3,270 2,958 442 530
Natural gas liquids (bbl/d) 6 5 5 6
Crude oil (bbl/d) 1,185 847 62 367
Total (boe/d) 1,736 1,345 140 461
Operating netbacks ($/boe) ((1))
Natural gas ($/Mcf) $0.57 $1.01 $1.05 $0.51
Crude oil ($/bbl) $57.88 $65.06 ($98.26) $2.85
Total ($/boe) $41.95 $42.40 ($39.03) $3.16
((1))Non-IFRS measures - see "Non-IFRS Measures" section within the Q4 2022
MD&A
((2))Long term restricted cash not included in working capital
2022 Year-End Reserves
Arrow has also filed on SEDAR, the Company's Statement of Reserves Data and
Other Oil and Gas Information, Report on Reserves Data by Independent
Qualified Reserves Evaluator, and Report of Management and Directors on Oil
and Gas Disclosure for the year ended December 31, 2022, as required by
section 2.1 of National Instrument 51-101 - Standards of Disclosure for Oil
and Gas Activities (together, the "Reserve Report").
To recap, the Company's Year-End 2022 Company Working Interest Gross Reserves
Highlights include:
· 3,376 Mboe of Proved Reserves ("1P Reserves");
· 7,691 Mboe of Proved plus Probable Reserves ("2P Reserves");
· 11,679 Mboe of Proved plus Probable plus Possible Reserves ("3P
Reserves")(1);
· 1P Reserves estimated net present value before income taxes of
US$57.9 million calculated at a 10% discount rate;
· 2P Reserves estimated net present value before income taxes of
US$127.3 million calculated at a 10% discount rate; and
· 3P Reserves estimated net present value before income taxes of
US$205.8 million calculated at a 10% discount rate.
Arrow refers readers to the Company's press release of March 29, 2023 for
additional details, as well as to the Reserve Report filed on SEDAR.
Discussion of Operating Results
During 2022, the Company increased production on the Tapir block, from the
drilling of the RCE-2 and RCS-1 wells, and the Oso Pardo field, with its Ombu
block maintaining steady production. The West Pepper well was consistently
producing throughout 2022 and the East Pepper Well was brought on stream,
increasing the Company's natural gas production in Canada.
Average Production by Property
Average Production Boe/d YTD 2022 Q4 2022 Q3 2022 Q2 2022 Q1 2022 Q4 2021
Oso Pardo 113 115 104 112 121 123
Ombu (Capella) 182 238 215 97 177 190
Rio Cravo Este (Tapir) 551 832 860 366 136 142
Total Colombia 847 1,185 1,179 575 434 455
Fir, Alberta 82 79 82 86 73 82
Pepper, Alberta 416 472 242 319 636 181
TOTAL (Boe/d) 1,345 1,736 1,503 980 1,144 719
For the three months and year ended December 31, 2022, the Company's average
production was 1,736 boe/d and 1,345 boe/d, respectively, which consisted of
crude oil production in Colombia at 1,185 boe/d and 847 bbl/d, natural gas
production of 3,270 Mcf/d and 2,958 Mcf/d, respectively, and minor amounts of
natural gas liquids from the Company's Canadian properties. The Company's Q4
2022 total production was 142% higher than its total production for the same
period in 2021.
Discussion of Financial Results
During Q4 2022 the Company continued to realize strong oil and gas prices, as
summarized below.
Three months ended December 31
2022 2021 Change
Benchmark Prices
AECO ($/Mcf) $4.42 $3.89 14%
Brent ($/bbl) $88.59 $79.80 11%
West Texas Intermediate ($/bbl) $82.65 $77.31 7%
Realized Prices
Natural gas, net of transportation ($/Mcf) $3.66 $3.37 9%
Natural gas liquids ($/bbl) $68.28 $56.43 21%
Crude oil, net of transportation ($/bbl) $72.29 $55.50 30%
Corporate average, net of transport ($/boe)((1)) $57.53 $44.15 30%
( (1)Non-IFRS measure)
Operating Netbacks
The Company also continued to realize positive operating netbacks, as
summarized below.
Three months ended December 31 Years ended
December 31
2022 2021 2022 2021
Natural Gas ($/Mcf)
Revenue, net of transportation expense $3.66 $3.37 $3.94 $3.19
Royalties (0.50) (0.34) (0.60) (0.33)
Operating expenses (2.59) (1.15) (2.34) (1.35)
Natural Gas Operating netback((1)) $0.57 $1.87 $1.01 $1.51
Crude oil ($/bbl)
Revenue, net of transportation expense $72.29 $55.50 $83.10 $58.62
Royalties (6.33) (3.60) (8.81) (5.37)
Operating expenses (8.08) (17.48) (9.24) (18.90)
Crude Oil Operating netback((1)) $57.88 $34.42 $65.06 $34.35
Corporate ($/boe)
Revenue, net of transportation expense $57.53 $44.15 $60.20 $47.37
Royalties (5.34) (2.95) (6.77) (4.31)
Operating expenses (10.24) (13.85) (11.04) (15.51)
Corporate Operating netback((1)) $41.95 $27.35 $42.40 $27.55
((1))Non-IFRS measure
The operating netbacks of the Company continued to improve during 2022 due to
several factors, such as increased production from both its Colombian and
Canadian assets, and improved crude oil and natural gas prices, which were
offset by increases in royalties and operating expenses for natural gas.
During 2022, the Company incurred $7.7 million of capital expenditures,
primarily in connection with the drilling of the RCE-2 and RCS-1 wells,
workovers in its RCE-1 and RCS-1 wells, and its East Pepper Montney well tie
in in Canada. Civil works were completed to start drilling three more wells in
Rio Cravo and in early 2023 the Company started shooting 100 km(2) of 3D
seismic in the Tapir block to highlight existing leads and prospects for
drilling. This acceleration in operational tempo is expected throughout 2023,
funded by cash on hand and cashflow. At the end of the year, Arrow had a cash
position of $13 million, which is expected to fund the Company's 2023 capital
program.
For further Information, contact:
Arrow Exploration
Marshall Abbott, CEO +1 403 651 5995
Joe McFarlane, CFO +1 403 818 1033
Brookline Public Relations, Inc.
Shauna MacDonald +1 403 538 5645
Canaccord Genuity (Nominated Advisor and Joint Broker)
Henry Fitzgerald-O'Connor +44 (0)20 7523 8000
James Asensio
Gordon Hamilton
Auctus Advisors (Joint Broker)
Jonathan Wright +44 (0)7711 627449
Rupert Holdsworth Hunt
Camarco (Financial PR)
Georgia Edmonds +44 (0)20 3781 8331
Rebecca Waterworth
Billy Clegg
About Arrow Exploration Corp.
Arrow Exploration Corp. (operating in Colombia via a branch of its 100% owned
subsidiary Carrao Energy S.A.) is a publicly traded company with a portfolio
of premier Colombian oil assets that are underexploited, under-explored and
offer high potential growth. The Company's business plan is to expand oil
production from some of Colombia's most active basins, including the Llanos,
Middle Magdalena Valley (MMV) and Putumayo Basin. The asset base is
predominantly operated with high working interests, and the Brent-linked light
oil pricing exposure combines with low royalties to yield attractive potential
operating margins. Arrow's 50% interest in the Tapir Block is contingent on
the assignment by Ecopetrol SA of such interest to Arrow. Arrow's seasoned
team is led by a hands-on executive team supported by an experienced board.
Arrow is listed on the AIM market of the London Stock Exchange and on TSX
Venture Exchange under the symbol "AXL".
Forward-looking Statements
This news release 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 "continue", "expect", "opportunity", "plan", "potential" and
"will" and similar expressions. The forward-looking statements contained in
this news release reflect several material factors and expectations and
assumptions of Arrow, including without limitation, Arrow's evaluation of the
impacts of COVID-19, the potential of Arrow's Colombian and/or Canadian assets
(or any of them individually), the prices of oil and/or natural gas, and
Arrow's business plan to expand oil and gas production and achieve attractive
potential operating margins. Arrow believes the 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 news release 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. The forward-looking
statements contained in this news release are made as of the date hereof and
the Company undertakes no obligations to update publicly or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise, unless so required by applicable securities laws.
Neither TSX Venture Exchange nor its Regulation Services Provider (as that
term is defined in policies of the TSX Venture Exchange) accepts
responsibility for the adequacy or accuracy of this release.
Glossary
Bbl/d or bop/d: Barrels per day
$/Bbl: Dollars per barrel
Mcf/d: Thousand cubic feet of gas per day
Mmcf/d: Million cubic feet of gas per day
$/Mcf: Dollars per thousand cubic feet of gas
Mboe: Thousands of barrels of oil equivalent
Boe/d: Barrels of oil equivalent per day
$/Boe: Dollars per barrel of oil equivalent
BOE's may be misleading particularly if used in isolation. A BOE conversion
ratio of 6 Mcf: 1 bblis based on an energy equivalency conversion method
primarily applicable at the burner tip and does not represent a value
equivalency at the wellhead.
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
(loss) or cash provided by operating activities or net loss and comprehensive
loss 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.
This Announcement contains inside information for the purposes of the UK
version of the market abuse regulation (EU No. 596/2014) as it forms part of
United Kingdom domestic law by virtue of the European Union (Withdrawal) Act
2018 ("UK MAR").
Arrow Exploration Corp.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ended DECEMBER 31, 2022 AND 2021
IN UNITED STATES DOLLARS
INDEPENDENT AUDITOR'S REPORT
To the Shareholders of Arrow Exploration Corp.
Report of the audit of the consolidated financial statements
Opinion
We have audited the consolidated financial statements of Arrow Exploration
Corp. and its subsidiaries (the Company), which comprise the consolidated
statement of financial position as at December 31, 2022, and the consolidated
statement of operations and comprehensive income, changes in shareholders'
equity and cash flows for the year then ended, and notes to the consolidated
financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects the consolidated financial position of the
Company as at December 31, 2022, and its consolidated financial performance
and consolidated cash flows for the years then ended in accordance with
International Financial Reporting Standards (IFRSs).
Basis for opinion
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Our responsibilities under those standards are further described in
the Auditor's responsibilities for the audit of the consolidated financial
statements section of our report. We are independent of the Company in
accordance with the ethical requirements that are relevant to our audit of the
consolidated financial statements in Canada, and we have fulfilled our other
ethical responsibilities in accordance with these requirements. We believe
that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.
Key audit matter
Key audit matters are those matters that, in our professional judgment, were
of most significance in the audit of the consolidated financial statements of
the current period. This matter was addressed in the context of the audit of
the consolidated financial statements as a whole, and in forming the auditor's
opinion thereon, and we do not provide a separate opinion on these matters.
For the matter below, our description of how our audit addressed the matter is
provided in that context.
We have fulfilled the responsibilities described in the Auditor's
responsibilities for the audit of the consolidated financial statements
section of our report, including in relation to this matter. Accordingly,
our audit included the performance of procedures designed to respond to our
assessment of the risks of material misstatement of the consolidated financial
statements. The results of our audit procedures, including the procedures
performed to address the matter below, provide the basis for our audit opinion
on the accompanying consolidated financial statements.
Key audit matter How our audit addressed the key audit matter
Recoverable amount of property and equipment in the Capella block in Colombia
("Capella") cash generating unit ("CGU") and Canada CGU
For the year ended December 31, 2022, an impairment reversal of $10,409,615 To test the Company's estimated recoverable amounts for its Capella and Canada
was recorded with respect to property and equipment in the Capella CGU and an CGUs, we performed the following procedures, among others:
impairment charge of $1,388,961 was recorded with respect to property and
equipment in the Canada CGU. The Company's disclosures related to property · Evaluated the Company's independent reserve evaluator's
and equipment and impairment reversal and charges are included in notes 2, 3, competence, capability, and objectivity, as well as obtained an understanding
and 8 of the consolidated financial statements. An assessment is made at each of the work they performed.
reporting date as to whether there are any indicators for impairment or
reversal of previously recognized impairment. If such indicators exist, a · Involved our internal valuation specialists to assess the
previously recognized impairment loss is reversed and/or impairment charges methodology applied, and the various inputs utilized in determining the
are recognized. A reversal of previous impairment is limited to the extent discount rate by referencing current industry, economic, and comparable
that the carrying amount of the asset does not exceed its recoverable amount, company information, as well as company and cash-flow specific risk premiums.
nor does it exceed the carrying amount that would have been determined, net of
depreciation, had no impairment loss been recognized for the asset in prior · Compared forecasted benchmark commodity pricing and foreign
periods. The recoverable amounts of the Capella and Canada CGUs were exchange rates against other third-party price forecasts.
determined utilizing fair value less costs of disposal models based on the net
present value of future cash flows based on an independent reserve evaluation. · Assessed forecasted production, royalties, operating costs, and
future development costs by comparing them to historical results.
· Evaluated the adequacy of the relevant note disclosures included
Auditing the Company's estimated recoverable amounts for its Capella and in the consolidated financial statements in relation to this matter.
Canada CGUs was complex due to the subjective nature of the underlying inputs
and assumptions and the significant effect changes in these would have on the
recoverable amount. Additionally, the evaluation of this estimate required
specialized skills and knowledge. The primary inputs noted in the
determination of the recoverable amount were expected production volumes,
forecasted benchmark prices, forecasted exchange rates, royalties, operating
costs, future development costs, and discount rate.
Other matter
The consolidated financial statements of the Company for the year ended
December 31, 2021, were audited by another auditor who expressed an unmodified
opinion on those consolidated financial statements on April 25, 2022.
Other information
Management is responsible for the other information. The other information
comprises:
· Management's Discussion and Analysis
Our opinion on the consolidated financial statements does not cover the other
information and we do not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our
responsibility is to read the other information, and in doing so, consider
whether the other information is materially inconsistent with the consolidated
financial statements or our knowledge obtained in the audit or otherwise
appears to be materially misstated.
We obtained Management's Discussion & Analysis prior to the date of this
auditor's report. If, based on the work we have performed, we conclude that
there is a material misstatement of this other information, we are required to
report that fact in this auditor's report. We have nothing to report in this
regard.
Responsibilities of management and those charged with governance for the
consolidated financial statements
Management is responsible for the preparation and fair presentation of the
consolidated financial statements in accordance with IFRSs, and for such
internal control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible
for assessing the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless management either intends to
liquidate the Company or to cease operations, or has no realistic alternative
but to do so.
Those charged with governance are responsible for overseeing the Company's
financial reporting process.
Auditor's responsibilities for the audit of the consolidated financial
statements
Our objectives are to obtain reasonable assurance about whether the
consolidated financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor's report
that includes our opinion. Reasonable assurance is a high level of assurance
but is not a guarantee that an audit conducted in accordance with Canadian
generally accepted auditing standards will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on
the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing
standards, we exercise professional judgment and maintain professional
skepticism throughout the audit. We also:
· Identify and assess the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error, design and
perform audit procedures responsive to those risks, and obtain audit evidence
that is sufficient and appropriate to provide a basis for our opinion. The
risk of not detecting a material misstatement resulting from fraud is higher
than for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal
control.
· Obtain an understanding of internal control relevant to the audit
in order to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control.
· Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made by
management.
· Conclude on the appropriateness of management's use of the going
concern basis of accounting and, based on the audit evidence obtained, whether
a material uncertainty exists related to events or conditions that may cast
significant doubt on the Company's ability to continue as a going concern. If
we conclude that a material uncertainty exists, we are required to draw
attention in our auditor's report to the related disclosures in the
consolidated financial statements or, if such disclosures are inadequate, to
modify our opinion. Our conclusions are based on the audit evidence obtained
up to the date of our auditor's report. However, future events or conditions
may cause the Company to cease to continue as a going concern.
· Evaluate the overall presentation, structure, and content of the
consolidated financial statements, including the disclosures, and whether the
consolidated financial statements represent the underlying transactions and
events in a manner that achieves fair presentation.
· Obtain sufficient appropriate audit evidence regarding the
financial information of the entities or business activities within the
Company to express an opinion on the consolidated financial statements. We are
responsible for the direction, supervision and performance of the group audit.
We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other
matters, the planned scope and timing of the audit and significant audit
findings, including any significant deficiencies in internal control that we
identify during our audit.
We also provide those charged with governance with a statement that we have
complied with relevant ethical requirements regarding independence, and to
communicate with them all relationships and other matters that may reasonably
be thought to bear on our independence, and where applicable, related
safeguards.
From the matters communicated with those charged with governance, we determine
those matters that were of most significance in the audit of the consolidated
financial statements of the current period and are therefore the key audit
matters. We describe these matters in our auditor's report unless law or
regulation precludes public disclosure about the matter or when, in extremely
rare circumstances, we determine that a matter should not be communicated in
our report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor's
report is Beth Sanford.
Calgary,
Canada
April 28, 2023
Arrow Exploration Corp.
Consolidated Statements of Financial Position
In United States Dollars
As at Notes December 31, 2022 December 31, 2021
ASSETS
Current assets
Cash $ 13,060,968 $ 10,878,508
Restricted cash and deposits 4 210,654 -
Trade and other receivables 5 2,568,290 639,582
Taxes receivable 6 801,177 719,049
Deposits and prepaid expenses 157,459 322,300
Inventory 705,677 247,063
17,504,225 12,806,502
Non-current assets
Deferred income taxes 14 872,286 4,839,785
Restricted cash and deposits 4 608,127 732,553
Exploration and evaluation 7 - 6,964,506
Property and equipment 8 34,205,610 15,852,452
Total Assets $ 53,190,248 $ 41,195,798
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 5,850,823 $ 3,120,777
Lease obligation 10 41,434 20,258
Promissory note 9 1,899,294 1,659,393
Derivative liability 12 9,540,423 -
Income taxes 14 1,488,916 -
18,820,890 4,800,428
Non-current liabilities
Long-term debt - 31,552
Lease obligations 10 22,317 34,434
Other liabilities 80,484 177,500
Deferred income taxes 14 5,066,684 3,371,936
Decommissioning liability 11 3,303,301 2,470,239
Promissory note 9 - 1,659,393
Derivative liability 12 - 4,692,203
Total liabilities 27,293,676 17,237,685
Shareholders' equity
Share capital 13 57,810,735 56,698,237
Contributed surplus 1,570,491 1,249,418
Deficit (32,839,282) (33,185,806)
Accumulated other comprehensive loss (645,372) (803,736)
Total shareholders' equity 25,896,572 23,958,113
Total liabilities and shareholders' equity $ 53,190,248 $ 41,195,798
Commitments and contingencies (Note 15)
The accompanying notes are an integral part of these consolidated financial
statements.
On behalf of the Board:
signed "Gage Jull"
Director
signed "Anthony Zaidi" Director
Gage
Jull
Anthony Zaidi
Arrow Exploration Corp.
Consolidated Statements of Operations and Comprehensive Income
In United States Dollars
For the years ended December 31, Notes 2022 2021
Revenue
Oil and natural gas 18 $ 28,135,254 $ 7,164,680
Royalties 18 (3,161,790) (652,187)
Total oil and natural gas revenue, net of royalties 24,973,464 6,512,493
Expenses
Operating 5,159,068 2,346,039
Administrative 6,723,201 4,881,113
Listing costs 171,328 583,972
Share-based compensation expense (recovery) 13 582,405 (84,668)
Financing costs:
Accretion 11 199,521 132,807
Interest 9, 10 460,233 797,943
Other 330,797 46,217
Foreign exchange loss (gain) 590,034 (84,924)
Depletion and depreciation 8 5,528,489 1,622,937
Impairment reversal of oil and gas properties, net 8 (9,020,654) (5,617,776)
Loss (gain) on derivative liability 12 5,974,674 (467,507)
Other income (163,266) (2,018,382)
16,535,830 2,137,771
Income before income tax 8,437,634 4,374,722
Income tax expense (recovery)
Current 14 2,428,862 149,040
Deferred 14 5,662,248 (1,467,850)
8,091,110 (1,318,810)
Net income 346,524 5,693,532
Other comprehensive income (loss)
Foreign exchange 158,364 (214,258)
Total other comprehensive income (loss) 158,364 (214,258)
Total comprehensive income $ 504,888 $ 5,479,274
Net income per share:
Basic $ 0.00 $ 0.06
Diluted $ 0.00 $ 0.06
Weighted average shares outstanding
Basic 215,468,129 94,553,391
Diluted 279,288,480 96,243,078
The accompanying notes are an integral part of these consolidated financial
statements.
Arrow Exploration Corp.
Statements of Changes in Shareholders' Equity
In United States Dollars
Accumulated other comprehensive loss
Contributed Surplus
Share Capital Deficit Total Equity
Balance January 1, 2022 $ 56,698,237 $ 1,249,418 $ (803,736) $ (33,185,806) $ 23,958,113
Issuances of common shares, net 1,112,498 - - - 1,112,498
Options settled in cash - (6,621) - - (6,621)
Net income - - - 346,524 346,524
Other comprehensive income - - 158,364 - 158,364
Share-based compensation - 327,694 - - 327,694
Balance December 31, 2022 $ 57,810,735 $ 1,570,491 $ (645,372) $ (32,839,282) $ 25,896,572
Accumulated other comprehensive loss
Share Capital Contributed Surplus
Deficit Total Equity
Balance January 1, 2021 $ 50,740,292 $ 1,521,845 $ (589,478) $ (38,879,338) $ 12,793,321
Subscription of common shares, net 5,957,945 - - - 5,957,945
Net income - - - 5,693,532 5,693,532
Other comprehensive loss - - (214,258) - (214,258)
Share-based compensation - (272,427) - - (272,427)
Balance December 31, 2021 $ 56,698,237 $ 1,249,418 $ (803,736) $ (33,185,806) $ 23,958,113
The accompanying notes are an integral part of these consolidated financial
statements.
Arrow Exploration Corp.
Consolidated Statements of Cash Flows
In United States Dollars
For the year ended December 31, Notes 2022 2021
Cash flows provided by (used in) operating activities:
Net income $ 346,524 $ 5,693,532
Items not involving cash:
Deferred taxes 14 5,662,248 (1,467,850)
Share-based compensation 13 327,694 (272,427)
Depletion and depreciation 8 5,528,489 1,622,937
Impairment reversal of oil and gas properties, net 8 (9,020,654) (5,617,776)
Interest on leases 10 9,696 6,506
Interest on promissory note 9 469,258 657,953
Accretion 11 199,521 132,807
Foreign exchange (gain) loss 79,581 (195,852)
Loss (gain) on derivative liability 12 5,974,674 (467,507)
Long-term debt forgiveness (7,692) -
Payment of asset decommissioning obligations 11 (76,131) (237,826)
Changes in non‑cash working capital balances:
Restricted cash and deposits (86,228) 262,489
Trade and other receivables (1,928,707) 1,817,008
Taxes receivable (82,129) 940,634
Deposits and prepaid expenses 164,840 (244,917)
Inventory (458,613) (217,759)
Income tax payable 1,488,916 -
Accounts payable and accrued liabilities 3,445,263 (6,918,112)
Cash provided by (used in) operating activities 12,036,550 (4,506,160)
Cash flows (used in) investing activities:
Additions to exploration and evaluation assets - (2,840)
Additions to property and equipment 8 (7,668,988) (1,708,706)
Changes in restricted cash and deposits - (272,271)
Changes in non-cash working capital (715,217) (2,063,099)
Cash flows (used in) investing activities (8,384,205) (4,046,916)
Cash flows provided by (used in) financing activities:
Subscription of common shares, net of costs 13 - 11,232,473
Issuances of common shares 13 510,786 -
Payment of promissory note 9 (1,888,750) (3,111,491)
Lease payments 10 (39,697) (24,535)
Payment of long-term debt (23,076) -
Cash flows provided by (used in) financing activities (1,440,737) 8,096,447
Effect of changes in the exchange rate on cash (29,148) (138,067)
Increase (decrease) in cash 2,182,460 (594,696)
Cash, beginning of period 10,878,508 11,473,204
Cash, end of period 13,060,968 10,878,508
Supplemental information
Interest paid $ 285,205 $ 336,804
Taxes paid $ - $ -
The accompanying notes are an integral part of these consolidated financial
statements.
1. Corporate Information
Arrow Exploration Corp. ("Arrow" or "the Company") is a public junior oil and
gas company engaged in the acquisition, exploration and development of oil and
gas properties in Colombia and in Western Canada. The Company's shares trade
on the TSX Venture Exchange and the AIM Market of the London Stock Exchange
plc under the symbol AXL. The head office of Arrow is located at 550, 333 -
11th Ave SW, Calgary, Alberta, Canada, T2R 1L9 and the registered office is
located at 1600, 421 - 7th Avenue SW, Calgary, Alberta, Canada, T2P 4K9.
2. Basis of Presentation
Statement of compliance
The Company prepares its consolidated financial statements in accordance with
International Financial Reporting Standards ("IFRS") as issued by the
International Accounting Standards Board (IASB). The consolidated financial
statements have been approved and authorized for issuance by the Board of
Directors ("the Board") on April 28, 2023.
Basis of measurement
These consolidated financial statements have been prepared on a historical
cost basis except for certain financial instruments that have been measured at
fair value and specifically noted within the notes to these consolidated
financial statements.
Functional and presentation currency
These consolidated financial statements are presented in United States
Dollars. The Canadian Dollar is the functional currency of the Company and its
wholly own subsidiary Arrow Holdings Ltd. (AHL). The functional currency of
the Company's subsidiaries operating in Colombia and Panama is the United
States Dollar.
Monetary assets and liabilities denominated in foreign currencies are
translated to the functional currency at the period-end exchange rate.
Non-monetary assets, liabilities, revenues and expenses are translated at
exchange rates at the transaction date. Exchange gains or losses are included
in the determination of net income or loss in the consolidated statements of
operations and comprehensive income.
Use of estimates and judgments
The preparation of consolidated financial statements requires management to
make estimates and use judgment regarding the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as at the
date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. By their nature, estimates are subject
to measurement uncertainty and changes in such estimates in future periods
could require a material change in the financial statements. Accordingly,
actual results may differ from the estimated amounts as future confirming
events occur. Significant estimates and judgments made by management in the
preparation of these financial statements are as follows:
Exploration and evaluation assets
Exploration and evaluation assets require judgment as to whether future
economic benefits exist, including the existence of proven or probable
reserves and the ability to finance exploration and evaluation projects, where
technical feasibility and commercial viability has not yet been determined.
Depletion and depreciation
The amounts recorded for depletion and depreciation are based on estimates of
proved and probable reserves. Assumptions that are valid at the time of
reserve estimation may change materially as new information becomes
available.
Changes in forward price estimates, production and future development costs,
recovery rates or decommissioning costs may change the economic status of
reserves and may ultimately result in reserves used for measurement purposes
being removed from similar calculations in future reporting periods.
Cash Generating Unit ("CGU")
IFRS requires that the Company's oil and natural gas properties be aggregated
into CGUs, based on their ability to generate largely independent cash flows,
which are used to assess the properties for impairment. The determination of
the Company's CGUs is subject to management's judgment.
Impairment of Property, plant and equipment and exploration and evaluation
assets
Indicators of impairment are assessed by management using judgment,
considering future plans, market conditions and commodity prices. In assessing
the recoverability, each CGU's carrying value is compared to its recoverable
amount, defined as the greater of its fair value less costs of disposal and
value in use. Recoverable amounts calculated for impairment testing are based
on estimates of future commodity prices, expected volumes, quantity of
reserves and discount rates as well as future development costs, royalties,
and operating costs. These calculations require the use of estimates and
assumptions, which by their nature, are subject to measurement uncertainty. In
addition, judgment is exercised by management as to whether there have been
indicators of impairment or of impairment reversal. Indicators of impairment
or impairment reversal may include, but are not limited to a changes in:
market value of assets, asset performance, estimate of future prices,
royalties and costs, estimated quantity of reserves and appropriate discount
rates.
Decommissioning obligations
Measurement of the Company's decommissioning liability involves estimates as
to the cost and timing of incurrence of future decommissioning programs. It
also involves assessment of appropriate discount rates, rates of inflation
applicable to future costs and the rate used to measure the accretion charge
for each reporting period. Measurement of the liability also reflects
current engineering methodologies as well as current environmental legislation
and standards.
Income taxes
The Company recognises deferred tax assets to the extent that it is probable
that the deductible temporary differences will reverse in the foreseeable
future and that sufficient taxable income will be generated in the future to
recover such deferred tax assets. Assessing the recoverability of deferred tax
assets requires the Company to make significant estimates related to
expectations of future taxable income. Estimates of future taxable income are
based on forecast cash flows from operations and the application of existing
tax laws. To the extent that future cash flows and taxable income differ
significantly from estimates, the ability of the Company to realise the net
deferred tax assets recorded at the reporting date could be impacted. In
addition, future changes in tax laws could limit the ability of the Company to
obtain tax deductions in future periods.
Provisions and contingencies
The Company recognizes provisions based on an assessment of its obligations
and available information. Any matters not included as provisions are
uncertain in nature and cannot be reasonably estimated. The Company makes
assumptions to determine whether obligations exist and to estimate the amount
of obligations that we believe exist. In estimating the final outcome of
litigation, assumptions are made about factors including experience with
similar matters, past history, precedents, relevant financial, scientific, and
other evidence and facts specific to the matter. This determines whether a
provision or disclosure in the financial statements is needed.
Stock-based compensation, warrants and derivative liability
The amounts recorded in respect of share purchase warrants granted and the
derivative liability for warrants issued are based on the Company's estimation
of their fair value, calculated using assumptions regarding the life of the
option or warrant, interest rates and volatility. By their nature, these
estimates and assumptions are subject to uncertainty, and the actual fair
value of options or warrants may differ at any time.
3. Summary of Significant Accounting Policies
The significant accounting policies used in the preparation of these
consolidated financial statements are described below and have been applied
consistently by the Company.
Interests in joint arrangements
Certain of the Company's exploration and production activities are regarded as
joint operations and are conducted under joint operating agreements, whereby
two or more parties jointly control the assets. These consolidated financial
statements reflect only the Company's share of these jointly controlled
operations, and the Company's proportionate share of the relevant revenue and
costs.
Subsidiaries
Subsidiaries are entities controlled by the Group. The financial statements of
subsidiaries are included in the Consolidated Financial Statements from the
date that control commences until the date that control ceases. The accounting
policies of subsidiaries have been changed when necessary to align them with
the policies adopted by the Group. Intra-group balances and transactions are
eliminated in preparing the consolidated financial statements.
Financial instruments
The Company considers whether a contract contains an embedded derivative when
it first becomes a party to it. Embedded derivatives are separated from the
host contract which is not measured at fair value through profit or loss when
the analysis shows that the economic characteristics and risks of embedded
derivatives are not closely related to those of the host contract. Financial
assets and financial liabilities are recognized in the Company's statement of
financial position when the Company becomes party to the contractual
provisions of the instrument. Financial assets are derecognized when the
contractual rights to the cash flows from the financial asset expire or when
the contractual rights to those assets are transferred. Financial
liabilities are derecognized when the obligation specified in the contract is
discharged, cancelled or expired.
Financial assets
The Company's financial assets are comprised of cash, restricted cash, trade
and other receivables and deposits. Cash and restricted cash are classified
as financial assets at fair value through profit or loss. Trade and other
receivables, and deposits are classified and measured at amortized cost using
the effective interest, less any impairment losses. The initial classification
of a financial asset depends upon the Company's business model for managing
its financial assets and the contractual terms of the cash flows. There are
three measurement categories into which the Company classified its financial
assets:
- Amortized Cost: Includes assets that are held within a business model
whose objective is to hold assets to collect contractual cash flows and its
contractual terms give rise on specified dates to cash flows that represent
solely payments of principal and interest;
- Fair Value through Other Comprehensive Income ("FVOCI"): Includes assets
that are held within a business model whose objective is achieved by both
collecting contractual cash flows and selling the financial assets, where its
contractual terms give rise on specified dates to cash flows that represent
solely payments of principal and interest; or
- Fair Value Through Profit or Loss ("FVTPL"): Includes assets that do not
meet the criteria for amortized cost or FVOCI and are measured at fair value
through profit or loss. This includes all derivative financial instruments.
At initial recognition, the Company measures a financial asset at its fair
value and, in the case of a financial asset not at FVTPL, including
transaction costs that are directly attributable to the acquisition of the
financial asset. Transaction costs of financial assets carried at FVTPL are
recorded as an expense. Financial assets are reclassified subsequent to their
initial recognition only if the business model for managing those financial
assets changes. The affected financial assets will be reclassified on the
first day of the first reporting period following the change in the business
model.
A financial asset is derecognized when the rights to receive cash flows from
the asset have expired or have been transferred and the Company has
transferred substantially all the risks and rewards of ownership.
Financial liabilities
Financial liabilities are classified as financial liabilities at fair value
through profit or loss or amortized cost. The Company's financial liabilities
are comprised of accounts payable and accrued liabilities, promissory note and
long-term debt. These are classified and measured at amortized cost using the
effective interest method.
Derivative liability
The non-compensation based warrants entitle the holder to acquire a fixed
number of common shares for a fixed British Pence price per share. An
obligation to issue shares for a price that is not fixed in the Company's
functional currency of Canadian Dollars, and that does not qualify as a
share-based payment, must be classified as a derivative liability and measured
at fair value with changes recognized in the statements of operations and
comprehensive income as they arise. The Company has recorded these changes as
derivative gain (loss) in the statement of operations and comprehensive
income. The transaction costs associated with exercising of the warrants are
expensed when incurred.
Fair value hierarchy
The Company classifies the fair value of financial instruments according to
the following hierarchy based on the amount of observable inputs used to value
the instrument:
- Level 1 - Quoted prices are available in active markets for
identical assets or liabilities as of the reporting date. Active markets are
those in which transactions occur in sufficient frequency and volume to
provide pricing information on an ongoing basis.
- Level 2 - Pricing inputs are other than quoted prices in active
markets included in Level 1. Prices in Level 2 are either directly or
indirectly observable as of the reporting date. Level 2 valuations are based
on inputs, including quoted forward prices for commodities, time value and
volatility factors, which can be substantially observed or corroborated in the
marketplace.
- Level 3 - Valuations in this level are those with inputs for the
asset or liability that are not based on observable market data.
Share capital
Common shares are classified as equity. Incremental costs directly
attributable to the issue of common shares and options are recognized as a
deduction from share capital, net of any tax effects.
Exploration and evaluation assets
Pre-license costs are recognized in the statement of operations and
comprehensive income as incurred. Exploration and evaluation costs include the
costs of acquiring undeveloped land and drilling costs are initially
capitalized until the drilling of the well is complete and the results have
been evaluated. The costs are accumulated in cost centers by well, field or
exploration area pending determination of technical feasibility and commercial
viability. The technical feasibility and commercial viability of extracting a
mineral resource is considered to be determinable when proved or probable
reserves are determined to exist. If proved and/or probable reserves are
found, the drilling costs and associated undeveloped land are transferred to
property and equipment after performing an impairment assessment. When
exploration and evaluation assets are determined not to be technically
feasible and commercially viable, or the Company decides not to continue with
its activity, the unrecoverable costs are charged to the consolidated
statements of operations and comprehensive income as pre-license expense.
Property and equipment
Items of property and equipment, which include oil and gas development and
production assets, are measured at cost less accumulated depletion,
depreciation and accumulated impairment losses, net of reversals. The cost of
development and production assets includes: transfers from exploration and
evaluation assets, which generally include the cost to drill the well and the
cost of the associated land upon determination of technical feasibility and
commercial viability; the cost to complete and tie-in the wells; facility
costs; the cost of recognizing provisions for future restoration and
decommissioning; geological and geophysical costs; and directly attributable
overheads.
Development and production assets are grouped into CGU's for impairment
testing. Gains and losses on disposal of an item of property and equipment,
including oil and natural gas interests, are determined by comparing the
proceeds from disposal with the carrying amount of property and equipment and
are recognized in the statement of operations and comprehensive income.
Subsequent costs:
Costs incurred subsequent to the determination of technical feasibility and
commercial viability and the costs of replacing parts of property and
equipment are recognized as oil and gas assets only when they increase the
future economic benefits embodied in the specific asset to which they relate.
All other expenditures are expensed as incurred. Such capitalized oil and
natural gas assets generally represent costs incurred in developing proved
and/or probable reserves and bringing in or enhancing production from such
reserves, and are accumulated on a field or geotechnical area basis. The
carrying amount of any replaced or sold component is derecognized. The costs
of the day-to-day servicing of property and equipment are recognized in
operating expenses as incurred.
Depletion and depreciation:
The net carrying value of development and production assets is depleted using
the unit of production method by reference to the ratio of production in the
period to the related proved plus probable reserves, taking into account
estimated future development costs necessary to bring those reserves into
production and the estimated salvage value of the assets at the end of their
useful lives. Future development costs are estimated taking into account the
level of development required to produce the reserves. Proved plus probable
reserves are estimated annually by independent qualified reserve evaluators
and represent the estimated quantities of crude oil, natural gas and natural
gas liquids which geological, geophysical and engineering data demonstrate
with a specified degree of certainty to be recoverable in future years from
known reservoirs and which are considered commercially producible.
Depreciation methods, useful lives and residual values are reviewed at each
reporting date.
Impairment
Financial assets
The Company recognizes loss allowances for Expected Credit Losses ("ECLs") on
its financial assets measured at amortized cost. Due to the nature of its
financial assets, the Company measures loss allowances at an amount equal to
expected lifetime ECLs. Lifetime ECLs are the anticipated ECLs that result
from all possible default events over the expected life of a financial asset.
ECLs are a probability-weighted estimate of credit losses. Credit losses are
measured as the present value of all cash shortfalls (i.e. the difference
between the cash flows due to the entity in accordance with the contract and
the cash flows that the Company expects to receive). ECLs are discounted at
the effective interest rate of the related financial asset. The Company does
not have any financial assets that contain a financing component.
Non-financial assets
The carrying amounts of the Company's non-financial assets are reviewed at
each reporting date to determine whether there is any indication of
impairment. If any such indication exists, then the asset's recoverable amount
is estimated. Exploration and evaluation assets are also assessed for
impairment prior to being transferred to property and equipment.
For the purpose of impairment testing, assets are grouped together into the
smallest group of assets that generates cash inflows from continuing use that
are largely independent of the cash inflows of other assets or groups of
assets (CGU). The recoverable amount of an asset or a CGU is the greater of
its value in use and its fair value less costs of disposal. Fair value less
cost to dispose is determined as the amount that would be obtained from the
sale of a CGU in an arm's length transaction between knowledgeable and willing
parties. The fair value less cost to dispose of oil and gas assets is
generally determined as the net present value of the estimated future cash
flows expected to arise from the continued use of the CGU, including any
expansion prospects, and its eventual disposal, using assumptions that an
independent market participant may take into account. These cash flows are
discounted by an appropriate discount rate which would be applied by such a
market participant to arrive at a net present value of the CGU.
Value in use is determined as the net present value of the estimated future
cash flows expected to arise from the continued use of the asset in its
present form and its eventual disposal. Value in use is determined by applying
assumptions specific to the Company's continued use and can only take into
account future development costs.
Estimates of future cash flows used in the evaluation of impairment of assets
are made using management's forecasts of commodity prices and expected
production volumes. The latter takes into account assessments of field
reservoir performance and includes expectations about proved and unproved
volumes, which are risk-weighted utilizing geological, production, recovery
and economic projections.
An impairment loss is recognized if the carrying amount of a CGU exceeds its
estimated recoverable amount. Impairment losses are recognized in the
statement of operations and comprehensive income. Impairment losses recognized
in respect of CGU's are allocated to reduce the carrying amounts of assets in
the CGU on a pro rata basis. Impairment losses recognized in prior years are
assessed at each reporting date to determine if facts and circumstances
indicate that the loss has decreased or no longer exists. An impairment loss
is reversed if there has been a change in the estimates used to determine the
recoverable amount. An impairment loss is reversed only to the extent that the
asset's carrying amount does not exceed the carrying amount that would have
been determined, net of depletion and depreciation, if no impairment loss had
been recognized.
Share-based compensation
The Company has a share-based compensation plan for which the compensation
cost attributed to stock options granted is measured at the fair value at the
grant date and expensed over the vesting period with a corresponding increase
to contributed surplus. A forfeiture rate is estimated on the grant date and
is adjusted to reflect the actual number of options or units that vest. Upon
the settlement of the stock options the previously recognized value in
contributed surplus is recorded as an increase to share capital.
Share-based compensation granted to non-employees is measured based on the
fair value of the goods or services received, except in cases where this is
not reliably measurable, and then the intrinsic value of the equity
instruments granted is used (i.e. the average value of the Company's shares
over the service period). Share-based compensation subject to performance
vesting conditions is recognized based on the Company's estimated probability
of achieving those performance vesting conditions determined at each reporting
date.
The grant date fair value of phantom shares and phantom stock options granted
to officers, employees and directors is recognized as share-based compensation
expense with a corresponding increase in accrued liabilities on a graded
vesting basis over the vesting period. Subsequent to initial recognition, the
phantom shares and phantom stock options accrued liability is measured at fair
value.
Provisions
A provision is recognized if, as a result of a past event, the Company has a
present legal or constructive obligation that can be estimated reliably, and
it is probable that an outflow of economic benefits will be required to settle
the obligation. Provisions are determined by discounting the expected future
cash flows at a pre-tax risk-free rate that reflects current market
assessments of the time value of money and the risks specific to the
liability. Provisions are not recognized for future operating losses.
Decommissioning obligations
The Company's activities give rise to dismantling, decommissioning and site
disturbance remediation activities. Provision is made for the estimated cost
of abandonment and site restoration and capitalized in the relevant asset
category. Decommissioning obligations are measured at the present value of
management's best estimate of the expenditure required to settle the present
obligation as at the reporting date. Subsequent to the initial measurement,
the obligation is adjusted at the end of each period to reflect the passage of
time and changes in the estimated future cash flows underlying the obligation.
The increase in the provision due to the passage of time is recognized as
accretion (within finance expense) whereas increases/decreases due to changes
in the estimated future cash flows or changes in the discount rate are
capitalized. Actual costs incurred upon settlement of the decommissioning
obligations are charged against the provision to the extent the provision was
established.
Leases
Lease arrangements which meet the criteria of a lease are recognized as
right-of-use assets and lease obligation at the lease commencement date. The
right-of-use asset is initially measured at cost. Subsequently, it is measured
at cost less accumulated depreciation and impairment losses and adjusted for
certain re-measurements of the lease obligation. The lease obligation is
measured at the present value of the lease payments outstanding at the lease
commencement date, discounted using the implicit rate, and when not
determinable, the Company's incremental borrowing rate. The lease obligation
is re-measured when there is a change in estimated future payments arising
from a change in a lease term, index or rate, residual guarantee or purchase
option. The assessment of whether a renewal, extension, termination or
purchase option is reasonably certain to be exercised was considered, based on
facts and circumstances, and has the potential to significantly impact the
amount of right-of-use asset and lease obligation recognized. The Company
recognizes interest expense incurred under finance leases over the lease term
in the consolidated statements of operations and comprehensive income using
the effective interest rate method.
Revenue
The Company's revenues are primarily derived from the production of petroleum
and natural gas. Revenue from contracts with customers is recognized when
the Company satisfies a performance obligation by physically transferring the
product and control to a customer. The Company satisfies its performance
obligations at the point of delivery of the product and not over a period of
time. Revenue is measured based on the consideration specified in contracts
with customers. Revenue is recorded net of any royalties when the amount of
revenue can be reliably measured and the costs incurred in respect of the
transaction can be measured reliably.
Income tax
Income tax expense is comprised of current and deferred tax. Income tax
expense is recognized in the statement of operations and comprehensive income
except to the extent that it relates to items recognized directly in equity,
in which case it is recognized in equity. Current tax is the expected tax
payable on the taxable income for the year, using tax rates enacted or
substantively enacted at the reporting date, and any adjustment to tax payable
in respect of previous years. Deferred tax is recognized on the temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for taxation purposes.
Deferred tax is not recognized on the initial recognition of assets or
liabilities in a transaction that is not a business combination. In addition,
deferred tax is not recognized for taxable temporary differences arising on
the initial recognition of goodwill.
Deferred tax is measured at the tax rates that are expected to be applied to
temporary differences when they reverse, based on the laws that have been
enacted or substantively enacted by the reporting date. Deferred tax assets
and liabilities are offset if there is a legally enforceable right to offset,
and they relate to income taxes levied by the same tax authority on the same
taxable entity, or on different tax entities, but they intend to settle
current tax liabilities and assets on a net basis or their tax assets and
liabilities will be realized simultaneously. A deferred tax asset is
recognized to the extent that it is probable that future taxable profits will
be available against which the temporary difference can be utilized. Deferred
tax assets are reviewed at each reporting date and are reduced to the extent
that it is no longer probable that the related tax benefit will be realized.
Earnings per share
Basic earnings per share is calculated by dividing the net income or loss
attributable to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is determined
by dividing the net income attributable to common shareholders and the
weighted average number of common shares outstanding for the effects of
dilutive instruments such as options and warrants granted. The number of
shares included with respect to options is computed using the treasury stock
method.
Recent Accounting Standards
During 2022, the Company adopted amendments published by IASB to IAS 16
Property, plant and Equipment and to IAS 37 Provisions Contingent Liabilities
and Contingent Assets. These amendments were adopted by the Company from
January 1, 2021 but they did not have a material impact on the Consolidated
Financial Statements.
Future Accounting Standards
The Company plans to adopt the following amendments to accounting standards,
issued by the IASB, that are effective for annual periods beginning on or
after January 1, 2023. The pronouncements will be adopted on their respective
effective dates and their impact to the financial statements is currently
under assessment.
i) Amendments to IAS 8 Changes in Estimates vs Changes in Accounting Policies:
In February 2021, the IASB issued amendments to IAS 8 Changes in Estimates vs
Changes in accounting Policies, to help distinguish changes in accounting
estimates from changes in accounting policies.
ii) Amendments to IAS 12 Income Taxes: In May 2021, the IASB issued amendments
to IAS 12 Income Taxes, which require entities to recognize deferred tax on
transaction that, on initial recognition, give rise to equal amounts of
taxable and deductible temporary differences.
iii) Amendments to IAS 1 Presentation of Financial Statements: In January
2020, the IASB issued amendments to IAS 1 Presentation of Financial
Statements, to clarify its requirements for the presentation of liabilities as
current or non-current in the statements of financial position. In October
2022, the IASB issued amendments to IAS 1, which specify the classification
and disclosure of a liability with covenants. These will be effective on
January 1, 2024.
4. Restricted Cash and deposits
December 31, December 31, 2021
2022
Colombia (i) $ 248,462 $ 53,726
Canada (ii) 570,319 678,827
Sub-total 818,781 732,553
Long-term portion (608,127) (732,553)
Current portion of restricted cash and deposits $ 210,654 $ -
(i) This balance is comprised of a deposit held as
collateral to guarantee abandonment expenditures related to the Tapir and
Santa Isabel blocks.
(ii) Pursuant to Alberta government regulations, the
Company was required to keep a $313,333 (CAD $424,398; 2021: $416,600) deposit
with respect to the Company's liability rating management ("LMR"). The deposit
is held by a Canadian chartered bank with interest paid to the Company on a
monthly basis based on the bank's deposit rate. The remaining $256,986 pertain
to commercial deposits with customers, lease and other deposits held in
Canada.
5. Trade and other receivables
December 31, December 31, 2021
2022
Trade receivables, net of advances $ 847,432 $ 252,141
Other accounts receivable 1,720,858 387,441
$ 2,568,290 $ 639,582
As at December 31, 2022, other accounts receivable includes a $1,070,825
(December 31, 2021 - $2,322) receivable from a partner in the Tapir block and
corresponds to reimbursable capital expenditures incurred on the Tapir block.
6. Taxes receivable
December 31, December 31, 2021
2022
Value-added tax (VAT) credits recoverable $ - $ 105,827
Income tax withholdings and advances, net 801,177 613,222
$ 801,177 $ 719,049
The VAT recoverable balance in 2021 pertains to non-compensated value-added
tax credits originated in Colombia as operational and capital expenditures are
incurred. The Company is entitled to compensate or claim for the reimbursement
of these VAT credits.
7. Exploration and Evaluation
December 31, December 31, 2021
2022
Balance, beginning of the period $ 6,964,506 $ 6,961,667
Additions, net - 2,839
Reclassification to Property and Equipment (6,964,506) -
Balance, end of the period $ - $ 6,964,506
During 2022, the Company determined the technical feasibility and commercial
viability of its Tapir assets related to the Rio Cravo Sur-1 discovery and
transferred $6,964,506 to its property and equipment. An impairment test on
this asset was prepared and no losses were identified as a result of such
test.
8. Property and Equipment
Oil and Gas Properties Right of Use and Other Assets
Cost Total
Balance, December 31, 2020 $ 30,436,344 $ 182,105 $ 30,618,449
Additions 1,734,746 1,380 1,736,126
Decommissioning adjustment (10,173) - (10,173)
Balance, December 31, 2021 $ 32,160,917 $ 183,485 $ 32,344,402
Additions 7,663,062 50,671 7,713,733
Transfers from exploration and evaluation assets 6,964,506 - 6,964,506
Decommissioning adjustment 756,541 - 756,541
Balance, December 31, 2022 $ 47,545,026 $ 234,156 $ 47,779,182
Accumulated depletion and depreciation and impairment
Balance, December 31, 2020 $ 20,718,742 $ 83,207 $ 20,801,949
Depletion and depreciation 1,591,179 31,758 1,622,937
Reversal of impairment losses of oil and gas properties
(5,617,776) - (5,617,776)
Balance, December 31, 2021 $ 16,692,145 $ 114,965 $ 16,807,110
Depletion and depreciation 5,482,218 46,271 5,528,489
Reversals net of impairment loss (9,020,654) - (9,020,654)
Balance, December 31, 2022 $ 13,153,709 $ 161,236 $ 13,314,945
Foreign exchange
Balance December 31, 2020 $ 339,364 $ (4,166) $ 335,198
Effects of movements in foreign
exchange rates (20,747) 709 (20,038)
Balance December 31, 2021 $ 318,617 $ (3,457) $ 315,160
Effects of movements in foreign
exchange rates (568,525) (5,262) (573,787)
Balance December 31, 2022 $ (249,908) $ (8,719) $ (258,627)
Net Book Value
Balance December 31, 2021 $ 15,787,389 $ 65,063 $ 15,852,452
Balance December 31, 2022 $ 34,141,409 $ 64,201 $ 34,205,610
As at December 31, 2022, the Company reviewed its cash-generating units
("CGU") for property and equipment and determined that there were indicators
of impairment reversal previously recognized in its Capella block in Colombia,
mostly driven by the recovery in energy commodity prices. The Company prepared
estimates of fair value less costs of disposal of its Capella and determined
that recoverable amount of the Capella field exceeded its carrying value and,
therefore, recognized an impairment loss reversal of $10,409,615.
Additionally, as at December 31, 2022, the Company determined there were
indicators of impairment in its Canada CGU, mainly due to revision of
reserves, and prepared estimates of fair value less costs of disposal of its
Canada CGU. It was determined that carrying value of its Canada CGU exceeded
its recoverable amount and, therefore, an impairment loss of $1,388,961 was
included in the consolidated statements of operations and comprehensive income
for the year ended December 31, 2022.
The following table outlines forecast benchmark prices and exchange rates used
in the Company's impairment test as at December 31, 2022:
Exchange rate AECO Spot Gas
Brent
Year $US / $Cdn US$/Bbl C$/MMBtu
2023 0.79 85.00 4.83
2024 0.79 82.80 4.50
2025 0.79 80.50 4.31
2026 0.79 82.00 4.42
2027 0.79 84.20 4.53
Thereafter (inflation %) 2.0%/yr 2.0%/yr
The recoverable amounts were estimated at their fair value less costs of
disposal, based on the net present value of the future cash flows from oil and
gas reserves as estimated by the Company's independent reserve evaluator at
December 31, 2022. The fair value less costs of disposal used to determine the
recoverable amounts are classified as Level 3 fair value measurements as
certain key assumptions are not based on observable market data but rather,
the Company's best estimate.
The Company used a 17.5% pre-tax discount rate, which took into account risks
specific to the Capella CGU and inherent in the oil and gas business, and a
15% pre-tac discount rate for its Canada CGU, and provided the following
recoverable values:
Recoverable Impairment
CGU Amount Loss (Reversal)
Canada 4,092,254 1,388,961
Capella 33,876,730 (10,409,615)
(9,020,654)
Effective February 9, 2023, the Agencia Nacional de Hidrocarburos ("ANH")
approved the suspension of the obligations and operations of the OMBU contract
due to force majeure circumstances generated by the blockades and social
unrest around the Capella field. The suspension is for an initial term of
three months and the Company, together with its partner and the ANH, is
monitoring this suspension to define next steps.
As at December 31, 2021, the Company reviewed its cash-generating units
("CGU") for property and equipment and determined that there were indicators
of impairment reversal previously recognized in its Tapir block in Colombia
and its Canada CGU mostly driven by the recovery in energy commodity prices.
The company prepared estimates of both the value in use and fair value less
costs of disposal of its CGUs and determined that recoverable amounts exceeded
their carrying value and, therefore, an impairment loss reversal of $5,617,776
is included in the consolidated statements of operations and comprehensive
income for the year ended December 31, 2021.
9. Promissory Note
The promissory note was issued to Canacol Energy Ltd. ("Canacol"), a related
party to the Company, as partial consideration in the acquisition of Carrao
Energy S.A. from Canacol. The promissory note bears interest at 15% per annum,
and, on October 18, 2021, Arrow and Canacol entered into a Seventh Amended and
Restated Promissory Note agreement with the following terms:
- The new principal amount of the promissory note is $6,026,166
- On or before October 31, 2021, the Company shall make a payment of
C$ 3,900,000 plus all Canacol's expenses incurred in connection with this
amendment and related matters;
- On or before December 31, 2022, the Company shall make a payment
equal to 50% of the total amount outstanding of interest and principal; and
- The remaining balance of principal and interest shall be paid no
later than June 30, 2023
This amendment also provided that, in the event that the Company made the
payment due on October 31, 2021, Canacol agreed to forgive $658,654 for excess
pipeline shipping costs, as a result of the settlement of the OBC pipeline
dispute (see note 15), which were recognized as other income in the statement
of operations and comprehensive income. On October 27, 2021, the Company paid
$3,111,491 (C$3,900,000) to Canacol as stipulated in this seventh amendment.
During December 2022, the Company made a payment of $1,888,750 to Canacol
equivalent to 50% of the outstanding balance of the promissory note, and its
current balance of $1,899,294 is presented as a current liability in the
condensed consolidated statement of financial position as at December 31,
2022. The Company has granted a general security interest to Canacol for the
obligations under the Promissory Note.
10. Lease Obligations
A reconciliation of the discounted lease obligation is set forth below:
2022 2021
Obligation, beginning of the period $ 54,692 $ 70,842
Changes in existing lease 44,701 1,381
Lease payments (39,697) (24,535)
Interest 9,696 6,506
Effects of movements in foreign exchange rates (5,641) 498
Obligation, end of the year $ 63,751 $ 54,692
Current portion (41,434) (20,258)
Long-term portion $ 22,317 $ 34,434
As at December 31, 2022, the Company has the following future lease
obligations:
Less than one year $ 45,944
2 - 5 years 22,972
Total lease payments 68,916
Amounts representing interest over the term (5,165)
Present value of the net obligation $ 63,751
During 2022, the Company changed its lease agreement to add space to its
corporate space and its related future lease obligation. As a result, the
Company increased its right-of-use assets and its lease obligation by $44,701.
11. Decommissioning Liability
The following table presents the reconciliation of the beginning and ending
aggregate carrying amount of the obligation associated with the
decommissioning of oil and gas properties.
December 31, December 31, 2021
2022
Obligation, beginning of the year $ 2,470,239 $ 2,584,907
Change in estimated cash flows 756,541 (10,173)
Payments or settlements (76,131) (237,826)
Accretion expense 199,521 132,807
Effects of movements in foreign exchange rates (46,869) 524
Obligation, end of the year $ 3,303,301 $ 2,470,239
The obligation was calculated using a risk-free discount rate range of 2.50%
to 3.75% in Canada (2021: 1.00% to 2.00%) and between 3.55% and 4.13% in
Colombia (2021: 8.46%) with an inflation rate of 3.0% and 3.5%, respectively
(2021: 2.0% and 4.5%). The majority of costs are expected to occur between
2023 and 2033. 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 $4,480,074 (2021: $4,222,717).
12. Derivative liability
Derivative liability includes warrants issued and outstanding as follows:
December 31, December 31,
2022 2021
Warrants Number Amounts Number Amounts
Balance beginning of the period 72,474,706 $ 4,692,303 - $ -
Issued in AIM financing (Note 13) - - 70,474,768 5,124,985
Issues in private placement (Note 13) - - 1,999,938 149,543
Exercised (4,637,288) (598,509) - -
Fair value adjustment - 5,974,674 - (467,507)
Foreign exchange - (528,045) (114,818)
Balance end of the period 67,837,418 $ 9,540,423 72,474,706 $ 4,692,203
Each warrant is exercisable at £0.09 per new common share for 24 months from
the issuance date and are measured at fair value quarterly using the
Black-Scholes options pricing model. The fair value of warrants at December
31, 2022 and 2021 was estimated using the following assumptions:
December 31, 2022 December 31, 2021
Number outstanding re-valued warrants 67,837,418 72,474,706
Fair value of warrants outstanding £0.1157 £0.048
Risk free interest rate 3.41% 0.50%
Expected life 0.82 years 1.82 years
Expected volatility 147% 160%
The following table summarizes the warrants outstanding and exercisable at
December 31, 2022:
Number of
warrants Exercise price Expiry date
67,184,769 £0.09 October 24, 2023
652,649 £0.09 November 22, 2023
67,837,418
13. Share Capital
(a) Authorized: Unlimited number of common shares without par value
(b) Issued:
2022 2021
Common shares Shares Amounts Shares Amounts
Balance beginning of the year 213,389,643 56,698,237 68,674,602 $50,740,292
Issued in AIM financing (i) - - 140,949,565 12,086,423
Issued in private placement (ii) - - 3,765,476 308,501
Allocated to warrants (Note 12) - - - (5,274,528)
Share issue costs (iii) - - - (1,162,451)
Issued from warrants exercised 4,637,288 1,094,574 - -
Issued from options exercised 375,000 17,924 - -
Balance at end of the year 218,401,931 57,810,735 213,389,643 56,698,237
(i) On October 2021, the Company raised approximately $12 million
(C$15.0 million), through a placing and subscription for new common shares
with new investors, Canacol (a related party), and executive management (the
Fundraising) as part of the Company's shares admission to trade on the AIM
Market of the London Stock Exchange plc. The Fundraising consisted on
placement and subscription of 140,949,565 new common shares at an issue price
of £0.0625 (C$0.106125) per new common share. The Company's executive
management invested approximately C$ 1.41 million and Canacol participated in
the subscription to hold 19.9% of the enlarged share capital. Investors
received one warrant for every two new common shares, exercisable at £0.09
per new common share for 24 months from the AIM admission date (October 25,
2021).
(ii) On November 24, 2021, the Company announced that it closed a private
placement of C$395,375 for issuance of 3,765,476 new common shares and
1,999,938 warrants (see Note 14).
(iii) During 2021, the Company recognized share issue costs for $1,162,451
and listing costs of $583,972 associated with the financings completed in 2021
as per above.
(b) Stock options:
The Company has a stock option plan that provides for the issuance to its
directors, officers, employees and consultants options to purchase a number of
non-transferable common shares not exceeding 10% of the common shares that are
outstanding. The exercise price is based on the closing price of the Company's
common shares on the day prior to the day of the grant. A summary of the
status of the Company stock option plan as at December 31, 2022 and 2021 and
changes during the respective periods ended on those dates is presented below:
December 31, 2022 December 31, 2021
Stock Options Number of options Weighted average Number of options Weighted average
exercise Price exercise price
(CAD $) (CAD $)
Beginning of period 17,114,000 $0.18 6,859,000 $0.40
Granted 10,028,332 $0.27 11,400,000 $0.13
Expired/Forfeited (2,794,000) $0.12 (1,145,000) $1.04
Exercised (3,758,332) $0.11 - -
End of period 20,590,000 $0.24 17,114,000 $0.18
Exercisable, end of period 3,395,000 $0.42 2,969,669 $0.46
Date of Grant Number Outstanding Exercise Price Weighted Date of Number
(CAD $) Average Remaining Contractual Life Expiry Exercisable
December 31, 2022
October 22, 2018 1,050,000 $1.15 Oct. 22, 2028 1,050,000
May 3, 2019 345,000 $0.31 May 3, 2029 345,000
March 20, 2020 1,200,000 $0.05 March 20, 2030 800,000
April 13, 2020 2,000,000 $0.05 April 13, 2030 1,200,000
December 13, 2021 2,983,332 $0.13 June 13, 2024 -
December 13, 2021 2,983,336 $0.13 June 13, 2025 -
June 9, 2022 766,665 $0.28 December 9, 2023 -
June 9, 2022 766,667 $0.28 December 9, 2024 -
June 9, 2022 766,668 $0.28 December 9, 2025 -
September 7, 2022 749,999 $0.26 March 7, 2024 -
September 7, 2022 749,999 $0.26 March 7, 2025 -
September 7, 2022 750,002 $0.26 March 7, 2026 -
December 21, 2022 1,826,110 $0.28 June 13, 2023 -
December 21, 2022 1,826,111 $0.28 June 13, 2024 -
December 21, 2022 1,826,111 $0.28 June 13, 2025 -
Total 20,590,000 $0.24 3.21 years 3,395,000
During 2022, the Company recognized $327,694 as share-based compensation
expense (2021 - recovery of $272,427), with a corresponding effect in the
contributed surplus account.
(c) Phantom shares:
During 2020, the Company adopted a phantom share program for compensation of
its Directors and executives and granted 13,000,000 phantom common shares of
the Company which are vested immediately at CAD $0.00 per share. During 2021,
the Company recognized $259,527 as share-based compensation expense and a
total $1,761,667 were used entirely as part of management's subscription of
shares issued in the AIM financing (see Common Shares section).
(d) Phantom stock options:
During 2020, the Company adopted a phantom stock option program for
compensation of its executives and granted 1,681,000 phantom stock options of
the Company which are vested in equal parts over the three following years
after granted. During 2021, the Company recognized $34,450 as share-based
compensation expense and a total $151,290 were used entirely as part of
management's subscription of shares issued in the AIM financing (see Common
Shares section).
14. Income taxes
The provision for income taxes varies from the amount that would be computed
by applying the expected tax rate to income loss before income taxes. The
principal reasons for differences between such expected income tax expense and
the amount actually recorded are as follows:
2022 2021
Income before income taxes $ 8,437,634 $ 4,374,722
Corporate income tax rate 23% 23%
Computed expected tax expense 1,940,656 $ 1,006,186
Increase (decrease) in income taxes resulting from:
Share-based compensation 133,953 19,474
(Recognized)/unrecognized deferred tax benefits 1,144,776 (3,871,436)
Tax rate difference on foreign jurisdictions 2,396,640 783,741
Other permanent difference 1,601,222 (332,528)
Change in deferred tax asset 932,088 -
Foreign exchange and others (58,225) 1,075,753
Income tax expense (recovery) $ 8,091,110 $ (1,318,810)
As at December 31, 2022, the Company recognized a deferred income tax asset
of $872,286 and a deferred tax liability of $5,066,684 which represents the
tax impact of temporary differences and management's estimation of current tax
benefits that would be realized to compensate future taxable income, due to an
increase in forecast commodity prices, at substantially enacted tax rates. In
Colombia, the enacted tax rate is 35% for 2022, and at the beginning on
January 1, 2023, the Colombian government mandated an additional tax rate of
5%, 10% or 15% for oil producers, subject to international oil prices. The
components of the Company's deferred income tax assets and liabilities are as
follows:
As at December 31 2022 2021
Property and equipment $ (9,089,462) $ (2,421,172)
Decommissioning liabilities and other provisions 1,285,642 637,785
Carryforward non-capital losses 3,609,422 3,251,237
Net change in deferred tax $ (4,194,398) $ 1,467,850
Deferred tax liability 5,066,684 3,371,935
Deferred tax asset $ 872,286 $ 4,839,785
At December 31, 2022, the Company had non-capital losses carried forward of
approximately $47,846,426 (2021 - $63,875,000) available to reduce future
years taxable income. These losses commence expiring in 2029. At December 31,
2022, the Company had income tax credits and benefits, including non-capital
losses, of approximately $53,664,028 (2021 - $54,586,346) related to Canada
that were not recognized in the financial statements due to uncertainties
associated with its ability to utilize these balances in the future.
15. Commitments and Contingencies
Exploration and Production Contracts
The Company has entered into a number of exploration contracts in Colombia
which require the Company to fulfill work program commitments and issue
financial guarantees related thereto. In aggregate, the Company has
outstanding exploration commitments at December 31, 2022 of $17.8 million. The
Company, in conjunction with its partners, have made applications to cancel
$15.5 million ($5.8 million Arrow's share as per table below) in commitments
on the Macaya and Los Picachos blocks. The remaining commitments are expected
to be satisfied by means of seismic work, exploration drilling and farm-outs.
Presented below are the Company's exploration and production contractual
commitments at December 31, 2022:
Block Less than 1 year 1-3 years Thereafter Total
COR-39 - 12,000,000 - 12,000,000
Los Picachos - 1,970,000 - 1,970,000
Macaya - 3,830,000 - 3,830,000
Total - - 17,800,000
17,800,000
Contingencies
From time to time, the Company may be involved in litigation or has claims
sought against it in the normal course of business operations. Management of
the Company is not currently aware of any claims or actions that would
materially affect the Company's reported financial position or results from
operations. Under the terms of certain agreements and the Company's by-laws
the Company indemnifies individuals who have acted at the Company's request to
be a director and/or officer of the Company, to the extent permitted by law,
against any and all damages, liabilities, costs, charges or expenses suffered
by or incurred by the individuals as a result of their service.
Oleoducto Bicentenario de Colombia ("OBC") Pipeline
The Company was party to an agreement with Canacol (a related party) that
entitled it to a 0.5% interest in OBC, which owns a pipeline system intended
to link Llanos basin oil production to the Caño Limon oil pipeline system in
Colombia.
Additionally, Canacol was in litigation with OBC in relation to ship or pay
obligations that were terminated by Canacol in July 2018 under force majeure.
During 2021, negotiations between the parties involved were finally settled
and approved by the courts and the Company does not have any further interest
nor any past and future ship or pay obligations associated with OBC.
Letters of Credit
At December 31, 2022, the Company had obligations under Letters of Credit
("LC's") outstanding totaling $2.8 million to guarantee work commitments on
exploration blocks and other contractual commitments. In the event the Company
fails to secure the renewal of the letters of credit underlying the ANH
guarantees, or any of them, the ANH could decide to cancel the underlying
exploration and production contract for a particular block, as applicable.
Current Outstanding Letters of Credit
Contract Beneficiary Issuer Type Amount Renewal Date
(US $)
SANTA ISABEL ANH Carrao Energy Abandonment $563,894 April 14, 2024
ANH Carrao Energy Financial Capacity $1,672,162 December 31, 2023
CORE - 39 ANH Carrao Energy Compliance $100,000 June 30, 2023
OMBU ANH Carrao Energy Financial Capacity $436,300 April 14, 2024
Total $2,772,356
16. Risk Management
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
Commodity price risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate as a result of changes in commodity
prices. Lower commodity prices can also impact the Company's ability to
raise capital. Commodity prices for crude oil are impacted by world economic
events that dictate the levels of supply and demand. From time to time the
Company may attempt to mitigate commodity price risk through the use of
financial derivatives. There were no derivative contracts during 2022 and
2021.
(b) Credit Risk
Credit risk reflects the risk of loss if counterparties do not fulfill their
contractual obligations. The majority of the Company's account receivable
balances relate to petroleum and natural gas sales and balances receivables
with partners in areas operated by the Company. The Company's policy is to
enter into agreements with customers that are well established and well
financed entities in the oil and gas industry such that the level of risk is
mitigated. In Colombia, a significant portion of the sales is with a producing
company under an existing sale/offtake agreement with prepayment provisions
and priced using the Brent benchmark. The Company's trade account receivables
primarily relate to sales of crude oil and natural gas, which are normally
collected within 25 days (in Canada) and up to 15 days in advance (in
Colombia) of the month of production. Other accounts receivable mainly
relate to balances owed by the Company's partner in one of its blocks, and are
mainly recoverable through join billings. The Company has historically not
experienced any collection issues with its customers and partners.
(c) Market Risk
Market risk is comprised of two components: foreign currency exchange risk and
interest rate risk.
i) Foreign Currency Exchange Risk
The Company operates on an international basis and therefore foreign exchange
risk exposures arise from transactions denominated in currencies other than
the United States dollar. The Company is exposed to foreign currency
fluctuations as it holds cash and incurs expenditures in exploration and
evaluation and administrative costs in foreign currencies. The Company incurs
expenditures in Canadian dollars, United States dollars and the Colombian peso
and is exposed to fluctuations in exchange rates in these currencies. There
are no exchange rate contracts in place.
ii) Interest Rate Risk
Interest rate risk is the risk that future cash flows will fluctuate as a
result of changes in market interest rates. The Company is not currently
exposed to interest rate risk as it borrows funds at a fixed coupon rate of
15% on the promissory notes.
(d) Liquidity Risk
Liquidity risk includes the risk that, as a result of the Company's
operational liquidity requirements:
· The Company will not have sufficient funds to settle a
transaction on the due date;
· The Company will be forced to sell financial assets at a value
which is less than what they are worth; or
· The Company may be unable to settle or recover a financial asset.
The Company's approach to managing its liquidity risk is to ensure, within
reasonable means, sufficient liquidity to meet its liabilities when due, under
both normal and unusual conditions, without incurring unacceptable losses or
jeopardizing the Company's business objectives.
The Company prepares annual capital expenditure budgets which are monitored
regularly and updated as considered necessary. Petroleum and natural gas
production is monitored daily to provide current cash flow estimates and the
Company utilizes authorizations for expenditures on projects to manage capital
expenditures. Any funding shortfall may be met in a number of ways, including,
but not limited to, the issuance of new debt or equity instruments, further
expenditure reductions and/or the introduction of joint venture partners.
(e) Capital Management
The Company's objective is to maintain a capital base sufficient to provide
flexibility in the future development of the business and maintain investor,
creditor and market confidence. The Company manages its capital structure
and makes adjustments in response to changes in economic conditions and the
risk characteristics of the underlying assets. The Company considers its
capital structure to include share capital, bank debt (when available),
promissory notes and working capital, defined as current assets less current
liabilities. In order to maintain or adjust the capital structure, from time
to time the Company may issue common shares or other securities, sell assets
or adjust its capital spending to manage current and projected debt levels.
The Company monitors leverage and adjusts its capital structure based on its
net debt level. Net debt is defined as the principal amount of its
outstanding debt, less working capital items. In order to facilitate the
management of its net debt, the Company prepares annual budgets, which are
updated as necessary depending on varying factors including current and
forecast crude oil prices, changes in capital structure, execution of the
Company's business plan and general industry conditions. The annual budget
is approved by the Board of Directors and updates are prepared and reviewed as
required. The Company's capital includes the following:
December 31, 2022 December 31, 2021
Working capital $ (1,316,665) $ 8,006,074
Derivative liability 9,540,423 -
Non-Current portion of promissory note - (1,659,393)
$ 8,223,758 $ 6,346,681
17. Key Management Personnel
The Company has determined that key management personnel consists of its
executive management and its Board of Directors. In addition to the salaries
and fees paid to key management, the Company also provides compensation to
both groups under its share-based compensation plans. Compensation expenses
paid to key management personnel were as follows:
Years ended December 31
2022 2021
Salaries, severances and director fees $ 2,389,033 $ 2,410,920
Share-based compensation 568,565 227,659
$ 2,957,598 $ 2,638,579
18. Segmented Information
The Company has two reportable operating segments: Colombia and Canada. The
Company, through its operating segments, is engaged primarily in oil
exploration, development and production, and the acquisition of oil and gas
properties. The Canada segment is also considered the corporate segment. The
following tables show information regarding the Company's segments for the
years ended and as at December 31:
Year ended December 31, 2022 Colombia Canada Total
Revenue:
Oil Sales $ 23,723,228 $ - $ 23,723,228
Natural gas and liquid sales - 4,412,026 4,412,026
Royalties (2,513,730) (648,060) (3,161,790)
Expenses (11,984,561) (13,571,923) (25,556,484)
Impairment reversal (loss) of oil and gas properties 10,409,615 (1,388,961) 9,020,654
Taxes (8,091,110) - (8,091,110)
Net income (loss) $ 11,543,442 $ (11,196,918) $ 346,524
As at December 31, 2022 Colombia Canada Total
Current assets $ 14,679,159 $ 2,825,066 $ 17,504,225
Non-current:
Deferred income taxes 872,286 - 872,286
Restricted cash 37,808 570,319 608,127
Exploration and evaluation - - -
Property, plant and equipment 29,270,430 4,935,180 34,205,610
Total Assets $ 44,859,683 $ 8,330,565 $ 53,190,248
Current liabilities $ 5,474,361 $ 13,346,529 $ 18,820,890
Non-current liabilities:
Deferred income taxes 5,066,684 - 5,066,684
Other liabilities 80,484 - 80,484
Lease obligation - 22,317 22,317
Decommissioning liability 2,568,141 735,160 3,303,301
Total liabilities $ 13,189,670 $ 14,104,006 $ 27,293,676
Year ended December 31, 2021 Colombia Canada Total
Revenue:
Oil Sales $ 6,199,231 $ - $ 6,199,231
Natural gas and liquid sales - 965,449 965,449
Royalties (567,633) (84,554) (652,187)
Expenses (3,282,997) (4,472,550) (7,755,547)
Impairment reversal of oil and gas properties 4,182,575 1,435,201 5,617,776
Taxes 1,318,810 - 1,318,810
Net income (loss) $ 7,849,986 $ (2,156,454) $ 5,693,532
As at December 31, 2021 Colombia Canada Total
Current assets $ 5,198,545 $ 7,607,957 $ 12,806,502
Non-current:
Deferred income taxes 4,839,785 - 4,839,785
Restricted cash 53,726 678,827 732,553
Exploration and evaluation 6,964,506 - 6,964,506
Property, plant and equipment 9,876,172 5,976,280 15,852,452
Total Assets $ 26,932,734 $ 14,263,064 $ 41,195,798
Current liabilities $ 1,550,665 $ 3,249,763 $ 4,800,428
Non-current liabilities:
Long-term debt - 31,552 31,552
Lease obligation - 34,434 34,434
Other liabilities 177,500 - 177,500
Deferred income taxes 3,371,935 - 3,371,935
Decommissioning liability 1,822,244 647,996 2,470,240
Promissory note - 1,659,393 1,659,393
Derivative liability - 4,692,203 4,692,203
Total liabilities $ 6,922,344 $ 10,315,341 $ 17,237,685
Arrow Exploration Corp.
MANAGEMENT's DISCUSSION AND ANALYSIS
YEAR ended DECEMBER 31, 2022
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 April 28, 2023 and should be read in conjunction with Arrow's annual
consolidated financial statements and related notes for the year ended
December 31, 2022 and 2021. Additional information relating to Arrow is
available under Arrow's profile on www.sedar.com (http://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 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 the COVID-19 pandemic; 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 from (used in) 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 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:
Three months ended December 31, 2022 Year ended December 31, 2022 Three months ended December 31, 2021 Year ended December 31, 2021
(in United States dollars)
Net income 2,968,117 346,524 6,960,035 5,693,532
Add/(subtract):
Share based payments 367,693 582,405 241,438 (84,668)
Financing costs:
Accretion on decommissioning obligations 55,274 199,521 34,160 132,807
Interest 92,320 460,233 246,449 797,943
Other 45,693 330,797 (76,358) 46,216
Depreciation and depletion 1,878,557 5,528,489 511,813 1,622,937
Derivative income 1,005,740 5,974,674 (467,507) (467,507)
Impairment reversal of oil and gas properties (9,020,654) (9,020,654) (5,617,776) (5,617,776)
Income tax expense (recovery) , current and deferred 7,064,017 8,091,110 (1,291,612) (1,318,810)
Adjusted EBITDA ((1)) 4,456,757 12,493,099 540,642 804,674
Cash flows provided by (used in) operating activities 7,011,946 12,036,550 (922,307) (4,506,160)
Minus - Changes in non‑cash working capital balances:
Trade and other receivables (1,519,574) 1,928,707 (327,190) (1,817,008)
Restricted cash 220,588 86,228 - (262,489)
Taxes receivable (279,138) 82,129 (900,017) (940,634)
Deposits and prepaid expenses (4,412) (164,840) 113,602 244,917
Inventory 38 458,613 (137,252) 217,759
Accounts payable and accrued liabilities (1,980,243) (3,445,263) 1,770,157 6,918,112
Income tax payable (1,488,916) (1,488,916) - -
Funds flow from (used in) operations ((1)) 1,960,289 9,493,208 (403,007) (145,503)
((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.
FINANCIAL AND OPERATING HIGHLIGHTS
Three months ended December 31, 2022 Year ended December 31, 2022 Three months ended December 31, 2021 Year ended December 31, 2021
(in United States dollars, except as otherwise noted)
Total natural gas and crude oil revenues, net of royalties 8,931,562 24,973,464 3,038,832 6,512,493
Funds flow from (used in) operations ((1)) 1,960,289 9,493,208 (403,007) (145,503)
Funds flow from (used in) operations ((1)) per share -
Basic($) 0.01 0.04 (0.00) (0.00)
Diluted ($) 0.01 0.03 (0.00) (0.00)
Net income 2,968,117 346,524 6,960,035 5,693,532
Net income per share -
Basic ($) 0.01 0.00 0.04 0.06
Diluted ($) 0.01 0.00 0.04 0.06
Adjusted EBITDA ((1)) 4,456,757 12,493,099 540,642 804,674
Weighted average shares outstanding:
Basic 217,784,100 215,468,129 171,345,885 94,553,391
Diluted 288,239,348 279,288,480 173,035,572 96,243,078
Common shares end of period 218,401,931 218,401,931 213,389,623 213,389,623
Capital expenditures 2,106,463 7,668,988 1,991,163 2,221,643
Cash and cash equivalents 13,060,968 13,060,968 10,878,508 10,878,508
Current assets 17,504,225 17,504,225 12,806,502 12,806,502
Current liabilities 18,820,890 18,820,890 4,800,428 4,800,428
Adjusted working capital((1)) 8,223,758 8,223,758 8,006,074 8,006,074
Long-term portion of restricted cash and deposits((2)) 608,127 608,127 - -
Total assets 53,190,248 53,190,248 41,195,798 41,195,798
Operating
Natural gas and crude oil production, before royalties
Natural gas (Mcf/d) 3,270 2,958 442 530
Natural gas liquids (bbl/d) 6 5 5 6
Crude oil (bbl/d) 1,185 847 62 367
Total (boe/d) 1,736 1,345 140 461
Operating netbacks ($/boe) ((1))
Natural gas ($/Mcf) $0.57 $1.01 $1.05 $0.51
Crude oil ($/bbl) $57.88 $65.06 ($98.26) $2.85
Total ($/boe) $41.95 $42.40 ($39.03) $3.16
((1))Non-IFRS measures - see "Non-IFRS Measures" section within this MD&A
((2))Long term restricted cash not included in working capital
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, 2022 the Company held an interest in six oil blocks in
Colombia and oil and natural gas leases in seven areas in Canada as follows:
Gross Acres Working Interest Net Acres
COLOMBIA
Tapir Operated(1) 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
Los Picachos Non-operated 52,772 37.5% 19,790
Macaya Non-operated 195,255 37.5% 73,221
Total Colombia 465,417 227,005
CANADA
Ansell Operated 640 100% 640
Fir Non operated 7,680 32% 2,457
Penhold Non-operated 480 13% 61
Pepper Operated 23,680 100% 23,680
Wapiti Non-operated 1,280 13% 160
Total Canada 33,760 26,998
TOTAL 499,177 254,003
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.
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.
(1)The 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 km(2) 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.
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.
Year ended December 31, 2022 Financial and Operational Highlights
· For the year ended December 31, 2022, Arrow recorded $24,973,464
in revenues, net of royalties, on crude oil sales of 285,465 bbls, 1,946 bbls
of natural gas liquids ("NGL's") and 1,079,620 Mcf of natural gas sales;
· Funds flow from operations of $9,493,208;
· Adjusted EBITDA was $12,493,099;
· Net income of $346,524;
· Drilled two wells in the Tapir block, increasing its production
significantly
· Brought on production stream the East Pepper well.
Three Months Ended December 31, 2022 Financial and Operational Highlights
· For the three months ended December 31, 2022, Arrow recorded
$8,931,562 in revenues, net of royalties, on crude oil sales of 120,486 bbls,
512 bbls of natural gas liquids ("NGL's") and 300,802 Mcf of natural gas
sales;
· Funds used in operations of $1,960,289;
· Adjusted EBITDA for the three months was $4,456,757;
· Net income of $2,968,117
Annual 2022 Reserve Highlights
· 3,376 Mboe of Proved Reserves, net increase of 11% when compared
to 2021;
· 7,691 Mboe of Proved plus Probable Reserves, net decrease of 4%
when compared to 2021;
· Proved reserves estimated net present value, before income taxes,
of US$58 million using a 10% discount rate;
· Proved plus Probable Reserves estimated net present value, before
income taxes, of US$127 million using a 10% discount rate
Results of Operations
The Company has increased its production and improved its operations combined
with improved pricing of energy commodities. These have allowed the Company to
continue improving its balance sheet and its business profile. During 2022,
the Company increased its production in its Tapir block, from the drilling of
the RCE-2 and RCS-1 wells, and Oso Pardo blocks, with its Ombu block
maintaining a steady production. Also, the West Pepper well was consistently
producing throughout 2022 and the East Pepper Well was brought on stream,
increasing the Company's natural gas production in Canada.
Average Production by Property
Average Production Boe/d YTD 2022 Q4 2022 Q3 2022 Q2 2022 Q1 2022 Q4 2021
Oso Pardo 113 115 104 112 121 123
Ombu (Capella) 182 238 215 97 177 190
Rio Cravo Este (Tapir) 551 832 860 366 136 142
Total Colombia 847 1,185 1,179 575 434 455
Fir, Alberta 82 79 82 86 73 82
Pepper, Alberta 416 472 242 319 636 181
TOTAL (Boe/d) 1,345 1,736 1,503 980 1,144 719
For the three months and year ended December 31, 2022, the Company's average
production was 1,736 and 1,345 boe/d, respectively, which consisted of crude
oil production in Colombia at 1,185 and 847 bbl/d, natural gas production of
3,270 and 2,958 Mcf/d, respectively, and minor amounts of natural gas liquids
from the Company's Canadian properties. The Company's Q4 2022 total production
was 142% higher than its total production for the same period in 2021.
Average Daily Natural Gas and Oil Production and Sales Volumes
Three months ended December 31 Year ended
December 31
2022 2021 2022 2021
Natural Gas (Mcf/d)
Natural gas production 3,270 1,550 2,958 704
Natural gas sales 3,270 1,550 2,958 704
Realized Contractual Natural Gas Sales 3,270 1,550 2,958 704
Crude Oil (bbl/d)
Crude oil production 1,185 455 847 344
Inventory movements and other 238 78 (64) (54)
Crude Oil Sales 1,424 533 782 290
Corporate
Natural gas production (boe/d) 545 256 493 117
Natural Gas Liquids(bbl/d) 6 0 5 7
Crude oil production (bbl/d) 1,185 455 847 344
Total production (boe/d) 1,736 712 1,345 468
Inventory movements and other (boe/d) 238 78 (64) (54)
Total Corporate Sales (boe/d) 1,974 789 1,280 414
During the year and three months ended December 31, 2022 the majority of
production was attributed to Colombia, where all 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 December 31 Year ended
December 31
2022 2021 2022 2021
Natural Gas
Natural gas revenues 1,099,986 479,232 4,257,282 820,430
NGL revenues 34,978 56,657 154,744 145,019
Royalties (150,638) (41,568) (648,060) (84,554)
Revenues, net of royalties 984,327 494,321 3,763,966 880,895
Crude Oil
Crude Oil revenues 8,710,005 2,720,772 23,723,228 6,199,231
Royalties (762,770) (176,261) (2,513,730) (567,633)
Revenues, net of royalties 7,947,235 2,544,511 21,209,498 5,631,598
Corporate
Natural gas revenues 1,099,986 479,232 4,257,282 820,430
NGL revenues 34,978 56,657 154,744 145,019
Oil revenues 8,710,005 2,720,772 23,723,228 6,199,231
Total revenues 9,844,970 3,256,661 28,135,254 7,164,679
Royalties (913,408) (217,829) (3,161,790) (652,187)
Natural gas and crude oil revenues, net of royalties 8,931,562 3,038,832 24,973,464 6,512,493
Natural gas and crude oil revenues, net of royalties, for the three months and
the year ended December 31, 2022 was $8,931,562 and $24,973,464, respectively
(2021: $3,038,832 and $6,512,493, respectively), which represent an increase
of 194% and 283%, respectively. This significant increase is mainly due to
increased production in both segments, Colombia and Canada, combined with
improved pricing for energy commodities.
Average Benchmark and Realized Prices
Three months ended December 31 Years ended
December 31
2022 2021 Change 2022 2021 Change
Benchmark Prices
AECO ($/Mcf) $4.42 $3.89 14% $4.34 $2.91 49%
Brent ($/bbl) $88.59 $79.80 11% $98.89 $70.78 40%
West Texas Intermediate ($/bbl) $82.65 $77.31 7% $94.25 $68.09 38%
Realized Prices
Natural gas, net of transportation ($/Mcf) $3.66 $3.37 9% $3.94 $3.19 23%
Natural gas liquids ($/bbl) $68.28 $56.43 21% $79.52 $54.01 47%
Crude oil, net of transportation ($/bbl) $72.29 $55.50 30% $83.10 $58.62 42%
Corporate average, net of transport ($/boe)((1)) $57.53 $44.15 30% $60.20 $47.37 27%
( (1)Non-IFRS measure)
The Company realized a price of $57.53 and $60.20 per boe during the three
months and year ended December 31, 2022, respectively (2021: $44.15 and
$47.37, respectively) as commodity prices improved during 2022.
Operating Expenses
Three months ended December 31 Years ended
December 31
2022 2021 2022 2021
Natural gas & NGL's 778,767 218,557 2,521,700 347,421
Crude oil 973,224 1,392,310 2,637,368 1,998,618
Total operating expenses 1,751,991 1,610,867 5,159,068 2,346,039
Natural gas ($/Mcf) $2.59 $1.15 $2.34 $1.35
Crude oil ($/bbl) $8.08 $17.48 $9.24 $18.90
Corporate ($/boe)((1)) $10.24 $13.85 $11.04 $15.51
((1)Non-IFRS measure)
During the three months and year ended December 31, 2022, Arrow incurred
operating expenses of $1,751,991 and $5,159,068, respectively (2021:
$1,610,867 and $2,346,039, respectively), at an average cost of $10.24 and
$11.04 per boe (2021: $13.85 and $15.51, respectively) which is reflective of
the Company's increase in production volumes and decrease on a per barrel
basis when compared to 2021 levels.
Operating Netbacks
Three months ended December 31 Years ended
December 31
2022 2021 2022 2021
Natural Gas ($/Mcf)
Revenue, net of transportation expense $3.66 $3.37 $3.94 $3.19
Royalties (0.50) (0.34) (0.60) (0.33)
Operating expenses (2.59) (1.15) (2.34) (1.35)
Natural Gas Operating netback((1)) $0.57 $1.87 $1.01 $1.51
Crude oil ($/bbl)
Revenue, net of transportation expense $72.29 $55.50 $83.10 $58.62
Royalties (6.33) (3.60) (8.81) (5.37)
Operating expenses (8.08) (17.48) (9.24) (18.90)
Crude Oil Operating netback((1)) $57.88 $34.42 $65.06 $34.35
Corporate ($/boe)
Revenue, net of transportation expense $57.53 $44.15 $60.20 $47.37
Royalties (5.34) (2.95) (6.77) (4.31)
Operating expenses (10.24) (13.85) (11.04) (15.51)
Corporate Operating netback((1)) $41.95 $27.35 $42.40 $27.55
((1))Non-IFRS measure
The operating netbacks of the Company continued improving during 2022 due to
several factors, such as increasing production from both its Colombian and
Canadian assets, and improved crude oil and natural gas prices, which were
offset by increases in royalties and operating expenses for natural gas.
General and Administrative Expenses (G&A)
Three months ended December 31 Years ended
December 31
2022 2021 2022 2021
General & administrative expenses 2,146,000 1,840,646 7,285,135 4,972,290
G&A recovered from 3(rd) parties (172,169) (91,177) (561,934) (91,177)
Total G&A 1,973,831 1,749,469 6,723,201 4,881,113
G&A per boe $11.53 $23.72 $14.39 $32.27
For the three months and year ended December 31, 2022, G&A expenses,
before recoveries totaled $2,146,000 and $7,285,135, respectively (2021:
$1,840,646 and $4,972,290, respectively), which represents an increase when
compared to the same periods in 2021. This increase is mainly due to increased
salaries and performance bonuses paid to personnel and legal fees during 2022,
as well as increase in regulatory and marketing expenses associated with the
Company's dual listing in the London and Canadian markets. Despite these
increased expenses, and due to the Company's increased production, there is a
decrease in G&A expenses on a per barrel basis, when compared versus 2021.
Share-based Compensation
Three months ended December 31 Years ended
December 31
2022 2021 2022 2021
Share-based compensation expense (recovery) 367,693 241,438 582,405 (84,668)
Share-based payments compensation expense for the three months and year ended
December 31, 2022 totaled $367,693 and $582,405, respectively (2021: $241,438
and recovery of $84,668, respectively). During 2022, the Company granted
10,028,332 options (2021: 11,400,000) to its personnel, which were offset by
reversal of expenses from cancelled options due to resignations of option
holders. The share-based compensation expense is the result of the progressive
vesting of the options granted to the Company's employees, plus the effect of
cashless exercising, and net of cancellations and forfeitures, according to
the company's stock-based compensation plan.
Financing Costs
Three months ended December 31 Years ended
December 31
2022 2021 2022 2021
Financing expense paid or payable 138,013 170,091 791,030 844,159
Non-cash financing costs 55,274 34,160 199,521 132,807
Net financing costs 193,287 204,251 990,551 $976,966
The finance expense paid or payable represents mostly interest on the
promissory note due to Canacol, as partial payment for the acquisition of
Carrao Energy SA and have decreased due to partial payment of the outstanding
balance. In addition, financing expense includes fees and interest associated
with financing of standby letters of credit on certain of the Company's
Colombian blocks. The non-cash finance cost represents an increase in the
present value of the decommissioning obligation for the current periods. The
amount of this expense will fluctuate commensurate with the asset retirement
obligation as new wells are drilled or properties are acquired or disposed.
Depletion and Depreciation
Three months ended December 31 Years ended
December 31
2022 2021 2022 2021
Depletion and depreciation 1,878,557 511,813 5,528,489 1,662,937
Depletion and depreciation expense for the three months and year ended
December 31, 2022 totaled $1,878,557 and $5,528,489, respectively (2021:
$511,813 and $1,662,937, respectively). The Company uses the unit of
production method and proved plus probable reserves to calculate depletion
expense and this change is directly related with the increases in units
produced and reversals of impairment recognized during 2021, which increased
the depletable base for 2022.
Impairment reversal of oil and gas properties, net
Three months ended December 31 Years ended
December 31
2022 2021 2022 2021
Impairment (reversal) of oil and gas properties (9,020,654) (5,617,776) (9,020,654) (5,617,776)
As at December 31, 2022, the Company reviewed its cash-generating units
("CGU") for property and equipment and determined that there were indicators
of impairment reversal previously recognized in its Capella block in Colombia.
The company prepared estimates of fair value less costs of disposal of its
Capella CGUs and determined that recoverable amounts exceeded their carrying
value for $10,409,615, which was offset by an impairment loss of$1,388,961
determined in its Canada CGU which was mainly originated from a revision of
reserves. As at December 31, 2021, the Company recognized an impairment
reversal of $5,617,776 related to its Tapir and Canada CGUs.
Loss (gain) on Derivative Liability
Three months ended December 31 Years ended
December 31
2022 2021 2022 2021
Loss (gain) on Derivative Liability 1,005,740 (467,507) 5,974,674 (467,507)
During the three months and the year ended December 31, 2022, the Company
recorded a loss in derivative liability of $1,005,740 and $5,974,674,
respectively (2021: gain of $467,507) related to the valuation of its
outstanding warrants issued during its AIM listing and private placement
completed in 2021. These warrants provide the right to holders to convert them
into common shares at a fixed price set in a currency different to the
Company's functional currency and, therefore, they are considered a liability
and measured at fair value with changes recognized in the statements of
operations and comprehensive income.
Other income
Three months ended December 31 Years ended
December 31
2022 2021 2022 2021
Other income (110,669) (756,242) (163,266) (2,018,382)
The Company reported other income of $110,669 and $163,266 for the three
months and year ended December 31, 2022, respectively (2021: $756,242 and
$2,018,382, respectively). During 2021, the Company's recognized other income
from negotiations of accounts payable and debts with vendors, both in Colombia
and Canada, which have resulted in reductions of amounts actually paid in cash
to settle its liabilities, including a reversal of liabilities associated with
the OBC settlement.
Income Taxes
Three months ended December 31 Years ended
December 31
2022 2021 2021 2021
Current income tax expense 1,401,769 176,238 2,428,862 149,040
Deferred income tax expense (recovery) 5,662,248 (1,467,850) 5,662,248 (1,467,850)
Total income tax expense (recovery) 7,064,017 (1,291,612) 8,091,110 (1,318,810)
During 2022, the Company recognized a total income tax expense of $8,091,110
(2021: recovery of $1,318,810) which consisted on $2,428,862 of current income
tax expense (2021: $149,940) and $5,662,248 of deferred income tax expense
(2021: recovery of $1,467,850). This increase is mainly caused by the
significant improvement of the Company's net taxable income, especially in
Colombia, when compared versus 2021. During 2022, the Company has recognized a
deferred income tax asset balance of $872,286 (2021: $4,839,785) and a
deferred tax liability balance of $5,066,684 (2021: $3,371,936) which
represents the tax impact of temporary differences and management's estimation
of current tax benefits that would be realized to compensate future taxable
income.
LIQUIDITY AND CAPITAL RESOURCES
Capital Management
The Company's objective is to maintain a capital base sufficient to provide
flexibility in the future development of the business and maintain investor,
creditor and market confidence. The Company manages its capital structure
and makes adjustments in response to changes in economic conditions and the
risk characteristics of the underlying assets. The Company considers its
capital structure to include share capital, debt and adjusted working capital.
In order to maintain or adjust the capital structure, from time to time the
Company may issue common shares or other securities, sell assets or adjust its
capital spending to manage current and projected debt levels.
As at December 31, 2022, the Company has an adjusted working capital of
$8,223,758. The Company has continued improving its working capital, using its
operational cash flows to continue growing its operations. The overall
improvement in energy commodity prices has also positively impacted the
Company's capacity to generate sufficient financial resources to sustain its
operations and growth.
As at December 31, 2022 the Company's net debt was calculated as follows:
December 31, 2022
Current assets $ 17,504,225
Less:
Accounts payable and accrued liabilities 5,850,823
Promissory Note 1,899,294
Income taxes 1,488,916
Net debt ((1)) $ 8,265,192
((1))Non-IFRS measure
Adjusted Working Capital
As at December 31, 2022 the Company's adjusted working capital was calculated
as follows:
December 31, 2021
Current assets:
Cash and restricted cash $ 13,060,968
Restricted cash and deposits 210,654
Trade and other receivables 2,568,290
Taxes receivable 801,177
Other current assets 863,136
Less:
Accounts payable and accrued liabilities 5,850,823
Lease obligation 41,434
Promissory note 1,899,294
Income tax payable 1,488,916
Working capital((1)) $ 8,223,758
((1))Non-IFRS measure
Debt Capital
As of December 31, 2022, the Company currently has $1.9 million in outstanding
debt in the form of a promissory note payable to Canacol and its final payment
is due no later than June 30, 2023.
Letters of Credit
At December 31, 2022, the Company had obligations under Letters of Credit
("LC's") outstanding totaling $2.7 million to guarantee work commitments on
exploration blocks and other contractual commitments. In the event the Company
fails to secure the renewal of the letters of credit underlying the ANH
guarantees, or any of them, the ANH could decide to cancel the underlying
exploration and production contract for a particular block, as applicable. In
this instance, the Company could risk losing its entire interest in the
applicable block, including all capital expended to date and could possibly
also incur additional abandonment and reclamation costs if applied by the ANH.
Current Outstanding Letters of Credit
Contract Beneficiary Issuer Type Amount Renewal Date
(US $)
SANTA ISABEL ANH Carrao Energy Abandonment $563,894 April 14, 2024
ANH Carrao Energy Financial Capacity $1,672,162 December 31, 2023
CORE - 39 ANH Carrao Energy Compliance $100,000 June 30, 2023
OMBU ANH Carrao Energy Financial Capacity $436,300 April 14, 2024
Total $2,772,356
Share Capital
As at December 31, 2022, the Company had 218,401,931 common shares, 67,837,418
warrants and 20,590,000 stock options outstanding.
RELATED PARTIES
The following table provides a summary of the Company's Director's
compensation paid during the year ended December 31, 2022:
Salary or Annual Fee Bonus Stock-Based Total
Director Compensation
G. Jull 309,000 250,000 126,296 685,296
M. Abbott 309,000 250,000 149,785 708,785
M. Charash 66,000 109,500 25,546 201,046
G. Carnie 66,000 109,500 25,546 201,046
R. Sharma 66,000 - 61,610 127,610
A. Zaidi 66,000 - 55,224 121,224
Total 882,000 719,000 444,007 2,045,007
CONTRACTUAL OBLIGATIONS
The following table provides a summary of the Company's cash requirements to
meet its financial liabilities and contractual obligations existing at
December 31, 2022:
Less than 1 year 1-3 years Thereafter Total
Promissory Note $ 1,899,294 - - 1,899,294
Exploration and production contracts - 17,800,000 - 17,800,000
$ 1,899,294 17,800,000 - 19,699,294
Exploration and Production Contracts
The Company has entered into a number of exploration contracts in Colombia
which require the Company to fulfill work program commitments and issue
financial guarantees related thereto. In aggregate, the Company has
outstanding exploration commitments at December 31, 2022 of $17.8 million. The
Company, in conjunction with its partners, have made applications to cancel
$15.5 million ($5.79 million Arrow's share) in commitments on the Macaya and
Los Picachos blocks, and its $12 million commitment at its COR-39 block.
SUBSEQUENT EVENTS
Effective February 9, 2023, the Agencia Nacional de Hidrocarburos ("ANH")
approved the suspension of the obligations and operations of the OMBU contract
due to force majeure circumstances generated by the blockades and social
unrest around the Capella field. The suspension is for an initial term of
three months and the Company, together with its partner and the ANH, is
monitoring this suspension to define next steps.
SUMMARY OF THREE MONTHS RESULTS
2022 2021
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
Oil and natural gas sales, net of royalties 3,911,329
8,931,562 7,614,336 5,024,604 3,038,832 1,684,609 941,620 847,432
Net income (loss) 2,968,117 2,041,955 768,318 (5,431,865) 6,960,035 (21,782) (734,317) (510,405)
Income (loss) per share -
basic 0.01 0.02 0.00 (0.03) 0.04 (0.00) (0.01) (0.01)
diluted 0.01 0.00 0.00 (0.02) 0.04 (0.00) (0.01) (0.01)
Working capital (deficit) (1,316,665) 7,392,310 5,594,027 7,657,938 8,006,074 783,707 3,141,217 (2,659,690)
Total assets 53,190,248 46,979,259 42,670,153 39,914,240 41,195,798 25,362,323 25,948,551 27,684,920
Net capital expenditures 2,106,463 4,836,860 2,777,611 725,665 1,991,163 148,528 (15,378) 97,330
Average daily production (boe/d) 1,736 1,503 980 1,144 712 575 331 242
The Company's oil and natural gas sales have increased during 2022 due to
increased production in its existing assets, improved in oil and gas prices
and positive fluctuations in realized oil price differentials. The Company's
production levels in Colombia have progressively improved during 2021 and
2022. Trends in the Company's net income are also impacted most significantly
by operating expenses, financing costs, income taxes, depletion, depreciation
and impairment of oil and gas properties, and other income.
OUTSTANDING SHARE DATA
At April 27, 2023, the Company had the following securities issued and
outstanding:
Number Exercise Price Expiry Date
Common shares 228,979,841 n/a n/a
Warrants 57,259,507 GBP 0.09 Oct. and Nov, 2023
Stock options 750,000 CAD$ 1.15 October 22, 2028
Stock options 270,000 CAD$ 0.31 May 3, 2029
Stock options 1,200,000 CAD$ 0.05 March 20, 2030
Stock options 2,000,000 CAD$ 0.05 April 13, 2030
Stock options 2,983,332 GBP 0.07625 June 13, 2024
Stock options 2,983,336 GBP 0.07625 June 13, 2025
Stock options 766,665 CAD$0.28 December 9, 2023
Stock options 766,667 CAD$0.28 December 9, 2024
Stock options 766,668 CAD$0.28 December 9, 2025
Stock options 416,666 CAD$0.26 March 7, 2024
Stock options 416,666 CAD$0.26 March 7, 2025
Stock options 416,668 CAD$0.26 March 7, 2026
Stock options 1,826,110 GBP 0.1675 June 13, 2023
Stock options 1,826,111 GBP 0.1675 June 13, 2024
Stock options 1,826,111 GBP 0.1675 June 13, 2025
Stock options 216,667 GBP 0.1925 July 23, 2024
Stock options 216,667 GBP 0.1925 July 23, 2025
Stock options 216,666 GBP 0.1925 July 23, 2026
OUTLOOK
During 2022, the Company deployed a portion of the capital raised at the time
of the Admission to AIM on a successful two well drilling campaign at Rio
Cravo on the Tapir Block. These results, and the subsequent generation of
positive cashflows in Q3 and Q4 2022, provide Arrow with the funds required
for its $32 million capital program for 2023, including drilling of 10 wells,
seismic acquisition and the development of production facilities.
To date, the Company has already drilled three wells at Rio Cravo, which have
added an additional 1,500 boe/d and is currently moving its drilling rig to
the Carrizales Norte location on the Tapir Block, confirming Arrow's
commitment to increase production and shareholder value. The Company is able
to support the planned 2023 CAPEX program with current cash on hand and
cashflow from operations.
Arrow continues to focus on growth and improving its balance sheet and free
cash flow.
CRITICAL ACCOUNTING ESTIMATES
A summary of the Company's critical accounting estimates is contained in Note
3 Annual Financial Statements. These accounting policies are subject to
estimates and key judgements about future events, many of which are beyond
Arrow's control. The following is a discussion of the accounting estimates
that are critical to the consolidated financial statements.
Crude oil and natural gas assets - reserves estimates - Arrow retained
independent third-party petroleum engineers to evaluate its crude oil and
natural gas reserves, prepare an evaluation report, and report to the Reserves
Committee of the Board of Directors. The process of estimating crude oil and
natural gas reserves is subjective and involves a significant number of
decisions and assumptions in evaluating available geological, geophysical,
engineering and economic data. These estimates will change over time as
additional data from ongoing development and production activities becomes
available and as economic conditions affecting crude oil and natural gas
prices and costs change. Reserves can be classified as proved, probable or
possible with decreasing levels of likelihood that the reserves will be
ultimately produced.
Reserve estimates are a key input to the Company's depletion calculations and
impairment tests. Property, plant and equipment within each area are depleted
using the unit-of-production method based on proved and probable reserves
using estimated future prices and costs. In addition, the costs subject to
depletion include an estimate of future costs to be incurred in developing
proved and probable reserves. A revision in reserve estimates or future
development costs could result in the recognition of higher depletion charged
to net income.
Under the IFRS, the carrying amounts of property, plant and equipment are
reviewed at each reporting date to determine whether there is any indication
of impairment. If any such indication exists, the estimated recoverable amount
is calculated. For the purpose of impairment testing, assets are grouped
together into the smallest group of assets that generates cash inflows from
continuing use that are largely independent of the cash inflows of other
assets or groups of assets (the "cash-generating unit" or "CGU"). The
recoverable amount of an asset or a CGU is the greater of its value in use and
its fair value less costs to sell. In assessing value in use, the estimated
future cash flows are discounted to their present value using a pre-tax
discount rate that reflects current market assessments of the time value of
money and the risks specific to the asset. Value in use is generally computed
by reference to the present value of the future cash flows expected to be
derived from production of proven and probable reserves. Exploration and
evaluation ("E&E") assets will be allocated to the related CGU's to assess
for impairment, both at the time of any triggering facts and circumstances as
well as upon their eventual reclassification to producing assets (oil and
natural gas interests in property, plant and equipment). An impairment loss is
recognized in income if the carrying amount of an asset or its CGU exceeds its
estimated recoverable amount. Reserve, revenue, royalty and operating cost
estimates and the timing of future cash flows are all critical components of
the impairment test. Revisions of these estimates could result in a write-down
of the carrying amount of crude oil and natural gas properties.
Decommissioning obligations - The Company recognizes the estimated fair value
of the decommission liability in the period in which it is incurred and
records a corresponding increase in the carrying value of the related asset.
The future asset retirement obligation is an estimate based on the Company's
ownership interest in wells and facilities and reflects estimated costs to
complete the abandonment and reclamation as well as the estimated timing of
the costs to be incurred in future periods. Estimates of the costs associated
with abandonment and reclamation activities require judgement concerning the
method, timing and extent of future retirement activities. The capitalized
amount is depleted on a unit-of-production method over the life of the proved
and probable reserves. The liability amount is increased each reporting period
due to the passage of time and this accretion amount is charged to earnings in
the period, which is included as a financing expense. Actual costs incurred on
settlement of the decommissioning liability are charged against the liability.
Judgements affecting current and annual expense are subject to future
revisions based on changes in technology, abandonment timing, costs, discount
rates and the regulatory environment.
Share based payments - Stock options issued to employees and directors under
the Company's stock option plan are accounted for using the fair value method
of accounting for stock-based compensation. The fair value of the option is
recognized as a share-based payment and contributed surplus over the vesting
period of the option. Share based payment is determined on the date of an
option grant using the Black-Scholes option pricing model. The Black-Scholes
pricing model requires the estimation of several variables including estimated
volatility of Arrow's stock price over the life of the option, estimated
option forfeitures, estimated life of the option, estimated risk-free rate and
estimated dividend rate. A change to these estimates would alter the valuation
of the option and would result in a different related share-based payment.
Income taxes - Arrow follows the balance sheet method, providing for temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for taxation purposes.
Current tax is the expect tax payable on the taxable income for the year,
using tax rates enacted or substantially enacted at the reporting period, and
any adjustment to tax payable in respect to previous periods. Tax
interpretations and legislation in which the Company operates are subject to
change. As such, income taxes are subject to measurement uncertainty and
interpretations can impact net income through current tax arising from the
changes in the deferred income tax asset and liabilities.
Provisions and contingencies - The Company recognizes provisions based on an
assessment of its obligations and available information. Any matters not
included as provisions are uncertain in nature and cannot be reasonably
estimated. The Company makes assumptions to determine whether obligations
exist and to estimate the amount of obligations that we believe exist. In
estimating the final outcome of litigation, assumptions are made about factors
including experience with similar matters, past history, precedents, relevant
financial, scientific, and other evidence and facts specific to the matter.
This determines whether a provision or disclosure in the financial statements
is needed.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies is included in Note
3 Annual Financial Statements. These accounting policies are consistent with
those of the previous financial year as described in Note 3 of the Annual
Financial Statements.
DERIVATIVE COMMODITY CONTRACTS
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. During 2022, the Company did not have any financial derivative
contract in order to manage commodity price risks.
RISKS AND UNCERTAINTIES
The Company is subject to financial, business and other risks, many of which
are beyond its control and which could have a material adverse effect on the
business and operations of the Company. A summary of certain risk factors
relating to our business are disclosed below.
Unstable Oil and Gas Industry
Recent market events and conditions, including demand destruction resulting
from the COVID-19 pandemic, constant changes oil and natural gas supply,
actions taken by the Organization of Petroleum Exporting Countries (OPEC),
slowing growth in China and other emerging economies, market volatility and
disruptions in Asia, and sovereign debt levels in various countries, have
caused significant weakness and volatility in commodity prices. These events
and conditions have caused a significant volatility in the valuation of oil
and gas companies and a variable confidence in the oil and gas industry. Lower
commodity prices may also affect the volume and value of the Company's
reserves especially as certain reserves become uneconomic. In addition, in a
low commodity prices environment might affect the Company's cash flow. As a
result, the Company may not be able to replace its production with additional
reserves and both the Company's production and reserves could be reduced on a
year over year basis. Given the current market conditions, the Company may
have difficulty raising additional funds or if it is able to do so, it may be
on unfavourable and highly dilutive terms.
Prices, Markets and Marketing of Crude Oil and Natural Gas
Oil and natural gas are commodities whose prices are determined based on world
demand, supply and other factors, all of which are beyond the control of
Arrow. World prices for oil and natural gas have fluctuated widely in recent
years. Any material decline in prices could result in a reduction of net
production revenue. Certain wells or other projects may become uneconomic as a
result of a decline in world oil prices and natural gas prices, leading to a
reduction in the volume of Arrow's oil and gas reserves. Arrow might also
elect not to produce from certain wells at lower prices. All of these factors
could result in a material decrease in Arrow's future net production revenue,
causing a reduction in its oil and gas acquisition and development activities.
In addition to establishing markets for its oil and natural gas, Arrow must
also successfully market its oil and natural gas to prospective buyers. The
marketability and price of oil and natural gas which may be acquired or
discovered by Arrow will be affected by numerous factors beyond its control.
Arrow will be affected by the differential between the price paid by refiners
for light quality oil and the grades of oil produced by Arrow. The ability of
Arrow to market its natural gas may depend upon its ability to acquire space
on pipelines which deliver natural gas to commercial markets. Arrow will also
likely be affected by deliverability uncertainties related to the proximity of
its reserves to pipelines and processing facilities and related to operational
problems with such pipelines and facilities and extensive government
regulation relating to price, taxes, royalties, land tenure, allowable
production, the export of oil and natural gas and many other aspects of the
oil and natural gas business.
Substantial Capital Requirements; Liquidity
Arrow's cash flow from its production and sales of petroleum and natural gas
may not, at all times be sufficient to fund its ongoing activities. From time
to time, Arrow may require additional financing in order to carry out its oil
and gas acquisition, exploration and development activities. Failure to obtain
such financing on a timely basis could cause Arrow to forfeit its interest in
certain properties, miss certain acquisition opportunities and reduce or
terminate its operations. If Arrow's revenues from its production of petroleum
and natural gas decrease as a result of lower oil and natural gas prices or
otherwise, it may affect Arrow's ability to expend the necessary capital to
replace its reserves or to maintain its production. If Arrow's funds from
operations are not sufficient to satisfy its capital expenditure requirements,
there can be no assurance that additional financing will be available to meet
these requirements or available on terms acceptable to Arrow.
Arrow's lenders will be provided with security over substantially all of the
assets of Arrow. If Arrow becomes unable to pay its debt service charges or
otherwise commits an event of default, such as bankruptcy, these lenders may
foreclose on or sell Arrow's properties. The proceeds of any such sale would
be applied to satisfy amounts owed to Arrow's lenders and other creditors and
only the remainder, if any, would be available to Arrow shareholders. Arrow
monitors and updates its cash projection models on a regular basis which
assists in the timing decision of capital expenditures. Farm-outs of projects
may be arranged if capital constraints are an issue or if the risk profile
dictates that the Company wishes to hold a lesser working interest position.
Equity, if available and if on reasonable terms, may be utilized to help fund
Arrow's capital program.
Access to Capital
Access to capital has become limited during these times of economic
uncertainty. To the extent the external sources of capital become limited or
unavailable. Arrow's ability to make the necessary capital investments to
maintain or expand oil and gas reserves may be impaired.
Risks of Foreign Operations Generally
Most of Arrow's oil and gas properties and operations are located in a foreign
jurisdiction. As such, Arrow's operations may be adversely affected by changes
in foreign government policies and legislation or social instability and other
factors which are not within the control of Arrow, including, but not limited
to, nationalization, expropriation of property without fair compensation,
renegotiation or nullification of existing concessions and contracts, the
imposition of specific drilling obligations and the development and
abandonment of fields, changes in energy policies or the personnel
administering them, changes in oil and natural gas pricing policies, the
actions of national labour unions, currency fluctuations and devaluations,
exchange controls, economic sanctions and royalty and tax increases and other
risks arising out of foreign governmental sovereignty over the areas in which
Arrow's operations are conducted, as well as risks of loss due to civil
strife, acts of war, terrorism, guerrilla activities and insurrections.
Arrow's operations may also be adversely affected by laws and policies of
Colombia and Canada affecting foreign trade, taxation and investment. If
Arrow's operations are disrupted and/or the economic integrity of its projects
is threatened for unexpected reasons, its business may be harmed. Prolonged
problems may threaten the commercial viability of its operations. In addition,
there can be no assurance that contracts, licenses, license applications or
other legal arrangements will not be adversely affected by changes in
governments in foreign jurisdictions, the actions of government authorities or
others, or the effectiveness and enforcement of such arrangements. In the
event of a dispute arising in connection with Arrow's operations in Colombia,
Arrow may be subject to the exclusive jurisdiction of foreign courts or may
not be successful in subjecting foreign persons to the jurisdictions of the
courts of Canada or enforcing Canadian judgments in such other jurisdictions.
Arrow may also be hindered or prevented from enforcing its rights with respect
to a governmental instrumentality because of the doctrine of sovereign
immunity. Accordingly, Arrow's exploration, development and production
activities in Colombia could be substantially affected by factors beyond the
Company's control, any of which could have a material adverse effect on Arrow.
Acquiring interests and conducting exploration and development operations in
foreign jurisdictions often require compliance with numerous and extensive
procedures and formalities. These procedures and formalities may result in
unexpected or lengthy delays in commencing important business activities. In
some cases, failure to follow such formalities or obtain relevant evidence may
call into question the validity of the entity or the actions taken. Management
is unable to predict the effect of additional corporate and regulatory
formalities which may be adopted in the future including whether any such laws
or regulations would materially increase Arrow's cost of doing business or
affect its operations in any area. Arrow believes that management's experience
operating both in Colombia and in other international jurisdictions helps
reduce these risks. In Colombia, the government has a long history of
democracy and an established legal framework that, in Arrow's opinion,
minimizes political risks.
Social risks
The Company's activities are subject to social risks, including protests or
blockades by groups located near some of the Company's operations. Despite the
fact that the Company is committed to operating in a socially responsible
manner, the Company may face opposition from local communities and
non-governmental organizations with respect to its current and future
projects, which could adversely affect the Company's business, results of
operations and financial condition. No certainty can be given that the Company
will be able to reach an agreement with the different communities or special
interest groups, such as environmentalists and ethnic communities. Reaching
such an agreement may also incur unanticipated costs. The Company could also
be exposed to similar delays due to opposition from local communities in other
countries where the Company carries out its activities.
Russia-Ukraine Conflict
On February 24, 2022, Russian military forces launched a full-scale military
invasion of Ukraine. In response, Ukrainian military personal and civilians
are actively resisting the invasion. Many countries throughout the world have
provided aid to the Ukraine in the form of financial aid and in some cases
military equipment and weapons to assist in their resistance to the Russian
invasion. The North Atlantic Treaty Organization ("NATO") has also mobilized
forces to NATO member countries that are close to the conflict as deterrence
to further Russian aggression in the region. The outcome of the conflict is
uncertain and is likely to have wide ranging consequences on the peace and
stability of the region and the world economy. Certain countries including
Canada and the United States, have imposed strict financial and trade
sanctions against Russia and such sanctions may have far reaching effects on
the global economy. In addition, the German government paused the
certification process for the 1,200 km Nord Stream 2 natural gas pipeline that
was built to carry natural gas from Russia to Germany. As Russia is a major
exporter of oil and natural gas, the disruption of supplies of oil and natural
gas from Russia could cause a significant worldwide supply shortage of oil and
natural gas and significantly impact pricing of oil and gas worldwide. A lack
of supply and high prices of oil and natural gas could have a significant
adverse impact on the world economy. The long-term impacts of the conflict and
the sanctions imposed on Russia remain uncertain.
Alternatives to/Changing Demand for Petroleum Products
Fuel conservation measures, alternative fuel requirements, increasing consumer
demand for alternatives to oil and natural gas, and technological advances in
fuel economy and energy generation devices will reduce the demand for crude
oil, natural gas and other liquid hydrocarbons. The Company cannot predict the
impact of changing demand for oil and natural gas products and any major
changes would have a material adverse effect on the Company's business,
financial condition, results of operations and cash flow.
Exploration, Development and Production Risks
Oil and natural gas exploration involves a high degree of risk, for which even
a combination of experience, knowledge and careful evaluation may not be able
to overcome. There is no assurance that expenditures made on future
exploration by Arrow will result in new discoveries of oil or natural gas in
commercial quantities. It is difficult to project the costs of implementing an
exploratory drilling program due to the inherent uncertainties of drilling in
unknown formations, the costs associated with encountering various drilling
conditions such as over-pressured zones, tools lost in the hole and changes in
drilling plans and locations as a result of prior exploratory wells or
additional seismic data and interpretations thereof.
The long-term commercial success of Arrow will depend on its ability to find,
acquire, develop and commercially produce oil and natural gas reserves. No
assurance can be given that Arrow will be able to locate satisfactory
properties for acquisition or participation. Moreover, if such acquisitions or
participations are identified, Arrow may determine that current markets, terms
of acquisition and participation or pricing conditions make such acquisitions
or participations uneconomic.
Future oil and gas exploration may involve unprofitable efforts, not only from
dry wells, but from wells that are productive but do not produce sufficient
net revenues to return a profit after drilling, operating and other costs.
Completion of a well does not assure a profit on the investment or recovery of
drilling, completion and operating costs. In addition, drilling hazards or
environmental damage could greatly increase the cost of operations, and
various field operating conditions may adversely affect the production from
successful wells. These conditions include delays in obtaining governmental
approvals or consents, shut-ins of connected wells resulting from extreme
weather conditions, insufficient storage or transportation capacity or other
geological and mechanical conditions. While diligent well supervision and
effective maintenance operations can contribute to maximizing production rates
over time, production delays and natural reservoir performance declines cannot
be eliminated and can be expected to adversely affect revenue and cash flow
levels to varying degrees.
In addition, oil and gas operations are subject to the risks of exploration,
development and production of oil and natural gas properties, including
encountering unexpected formations or pressures, premature declines of
reservoirs, blow-outs, sour gas releases, fires and spills. Losses resulting
from the occurrence of any of these risks could have a materially adverse
effect on future results of operations, liquidity and financial condition.
Arrow attempts to minimize exploration, development and production risks by
utilizing a technical team with extensive experience to assure the highest
probability of success in its drilling efforts. The collaboration of a team of
seasoned veterans in the oil and gas business, each with a unique expertise in
the various upstream to downstream technical disciplines of prospect
generation to operations, provides the best assurance of competency, risk
management and drilling success. A full cycle economic model is utilized to
evaluate all hydrocarbon prospects. Detailed geological and geophysical
techniques are regularly employed including 3D seismic, petrography,
sedimentology, petrophysical log analysis and regional geological evaluation.
Governmental Regulation
The oil and gas business is subject to regulation and intervention by
governments in such matters as the awarding of exploration and production
interests, the imposition of specific drilling obligations, environmental
protection controls, control over the development and abandonment of fields
(including restrictions on production) and possible expropriation or
cancellation of contract rights, as well as with respect to prices, taxes,
export quotas, royalties and the exportation of oil and natural gas. Such
regulations may be changed from time to time in response to economic or
political conditions. The implementation of new regulations or the
modification of existing regulations affecting the oil and gas industry could
reduce demand for oil and natural gas, increase Arrow's costs and have a
material adverse effect on Arrow.
Global Pandemic
Arrow's business, financial condition and results of operations could be
materially and adversely affected by the outbreak of epidemics, pandemics and
other public health crises in geographic areas in which we have operations,
suppliers, customers or employees. The past COVID-19 pandemic, and actions
that may be taken by governmental authorities in response thereto, has
resulted, and may continue to result in, among other things: increased
volatility in financial markets and foreign currency exchange rates;
disruptions to global supply chains; labour shortages; reductions in trade
volumes; temporary operational restrictions and restrictions on gatherings
greater than a certain number of individuals, shelter-in- place declarations
and quarantine orders, business closures and travel bans; an overall slowdown
in the global economy; political and economic instability; and civil unrest.
The COVID-19 pandemic has resulted in, and may continue to result in, a
reduction in the demand for, and prices of, hydrocarbon and other commodities
that are closely linked to Arrow's financial performance, and also increases
the risk that storage for crude oil and refined petroleum products could reach
capacity in geographic locations in which we operate. A prolonged period of
decreased demand for, and prices of, these commodities, and any applicable
storage constraints, could also result in us voluntarily curtailing or
shutting in production and a decrease in our refined product volumes and
refinery utilization rates, which could adversely impact our business,
financial condition and results of operations. Arrow is also subject to risks
relating to the health and safety of our people, as well as the potential for
a slowdown or temporary suspension of our operations in locations impacted by
an outbreak, increased labour and fuel costs, and regulatory changes. Such a
suspension in operations could also be mandated by governmental authorities in
response to a pandemic. This could negatively impact Arrow's production
volumes and revenues for a sustained period of time, which would adversely
impact our business, financial condition and results of operations.
Credit Exposure
Recent economic conditions have increased the risk that certain counterparties
for the Company's oil and gas sales and our joint venture partners may fail to
pay. Arrow mitigates these increased risks through diversification and a
review process of the credit worthiness of our counterparties. Arrow's policy
to mitigate credit risk associated with product sales is to maintain marketing
relationships with large, established and reputable purchasers that are
considered creditworthy. Arrow has not experienced any collection issues with
its petroleum and natural gas marketers. Joint venture receivables are
typically collected within two to three months of the joint venture bill being
issued to the partner. Arrow attempts to mitigate the risk from joint venture
receivables by obtaining partner approval of significant capital and operating
expenditures prior to expenditure and in certain circumstances may require
cash deposits in advance of incurring financial obligations on behalf of joint
venture partners.
Health, Safety and Environment
All phases of the oil and natural gas business present environmental risks and
hazards and are subject to environmental regulation pursuant to a variety of
federal, provincial/state and local laws and regulations. Environmental
legislation provides for, among other things, restrictions and prohibitions on
spills, releases or emissions of various substances produced in association
with oil and natural gas operations. The legislation also requires that wells
and facility sites be operated, maintained, abandoned and reclaimed to the
satisfaction of applicable regulatory authorities. Compliance with such
legislation can require significant expenditures and a breach of applicable
environmental legislation may result in the imposition of fines and penalties,
some of which may be material. Environmental legislation is evolving in a
manner expected to result in stricter standards and enforcement, larger fines
and liability and potentially increased capital expenditures and operating
costs. The discharge of oil, natural gas or other pollutants into the air,
soil or water may give rise to liabilities to governments and third parties
and may require the Company to incur costs to remedy such discharge.
There are potential risks to the environment inherent in the business
activities of the Company. Arrow has developed and implemented policies and
procedures to mitigate health, safety and environment (HS&E) risks. Arrow
mitigates HS&E risks by maintaining its wells and complying with all
regulations. Regular field inspections are also carried out to ensure that all
field personnel and third party contractors comply with all company and
regulatory guidelines. An action plan has been developed to ensure inactive
wells are suspended properly and abandoned in a timely fashion. The above
noted policies and procedures are designed to protect and maintain the
environment and to ensure that the employees, contractors, subcontractors and
the public at large are kept safe at all times.
Foreign Exchange and Currency Risks
The Company is exposed to foreign exchange and currency risk as a result of
fluctuations in exchange rates between Colombian peso and the Canadian dollar.
Most of the Corporation's revenues and funds from financing activities are
expected to be received in reference to US dollar denominated prices while a
portion of its operating, capital, and general and administrative costs are
denominated in the Colombian peso and the Canadian dollar.
Widespread Pandemic
The Company's foreign operations are located in areas relatively remote from
local towns and villages and represent a concentration of personnel working
and residing in close proximity to one another. Should an employee or visitor
become infected with a serious illness that has the potential to spread
rapidly, this could place Arrow's workforce at risk. The 2020 outbreak of the
novel coronavirus (COVID-19) in China and other countries around the world is
one example of such an illness. The Corporation takes every precaution to
strictly follow industrial hygiene and occupational health guidelines. There
can be no assurance that this virus or another infectious illness will not
impact the Corporation's personnel and ultimately its operations.
Competition
Arrow actively competes for reserve acquisitions, exploration leases, licenses
and concessions and skilled industry personnel with a substantial number of
other oil and gas companies, many of which have significantly greater
financial and personnel resources than Arrow. Arrow's competitors include
major integrated oil and natural gas companies and numerous other independent
oil and natural gas companies and individual producers and operators.
Certain of Arrow's customers and potential customers are themselves exploring
for oil and natural gas, and the results of such exploration efforts could
affect Arrow's ability to sell or supply oil or gas to these customers in the
future. Arrow's ability to successfully bid on and acquire additional property
rights, to discover reserves, to participate in drilling opportunities and to
identify and enter into commercial arrangements with customers will be
dependent upon developing and maintaining close working relationships with its
future industry partners and joint operators and its ability to select and
evaluate suitable properties and to consummate transactions in a highly
competitive environment.
Social License to Operate
Heightened public monitoring and regulation of hydrocarbon resource producers,
refiners, distributors and commercial/retail sellers, especially where their
activities carry the potential for having negative impacts on communities and
the environment, involves varying degrees of risk to the Company's reputation,
relations with landowners and regulators, and in extreme cases even the
ability to operate. Arrow maintains an active website that complies with
Exchange requirements for timely disclosure and together with its press
releases and other SEDAR filings, is the primary means of communicating to the
general public. While media attention and public perception remains largely
beyond the control of Arrow's executive, employees, contractors and directors,
the Company makes every effort in its corporate and field operations to engage
all stakeholders in a respectful and transparent manner.
Internal Controls over Financial Reporting
The CEO and CFO, along with participation from other members of management,
are responsible for establishing and maintaining adequate Internal Control
over Financial Reporting ("ICFR") to provide reasonable assurance regarding
the reliability of financial statements prepared in accordance with IFRS. The
Company's CEO and CFO, with support of management have assessed the design and
operating effectiveness of the Corporation's ICFR as at December 31, 2022
based on criteria described in "Internal Control - Integrated Framework"
issued in 2013 by the Committee of Sponsoring Organization of the Treadway
Commission. Based on this assessment, it was concluded that the design and
operation of the Corporation's ICFR are effective as at December 31, 2022.
During the three months ended December 31, 2022, there has been no change in
the Corporation's ICFR that has materially affected, or is reasonably likely
to materially affect, the Corporation's ICFR.
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