REG - Arrow Exploration - Record Third Quarter Results & Operational Update
29/11/2022 07:00
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RNS Number : 8520H Arrow Exploration Corp. 29 November 2022
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ARROW ANNOUNCES RECORD THIRD QUARTER RESULTS, PROVIDES OPERATIONAL UPDATE AND
ANNOUNCES ISSUANCE OF COMMON SHARES
CALGARY, November 29, 2022 - Arrow Exploration Corp. (AIM: AXL; TSXV: AXL)
("Arrow" or the "Company") announces the filing of its unaudited interim
Financial Statements and Management's Discussion and Analysis ("MD&A") for
the quarter ended September 30, 2022, which are available on SEDAR
(www.sedar.com). All dollar figures are in U.S. dollars, except as otherwise
noted.
Highlights:
· The Third Quarter has been the best quarter in the Company's history
generating record cashflow from operations and a threefold increase in
production from the date of the AIM Admission.
o EBITDA of $4,664,345 compared to $966,234 in Q3 2021.
o Average corporate production of 1,503 boe/d compared to Q3 2021 575 boe/d
and Q2 2022 980 boe/d.
· Operating netbacks quarter-over-quarter, increased to $56.75/boe in
the third quarter of 2022 from $49.18/boe in the second quarter of 2022 due to
higher crude oil production and better netbacks from natural gas sales.
· Capital raised at the time of Admission to AIM has been deployed on
a successful two well drilling campaign at Rio Cravo on the Tapir Block in
Colombia, both of which were on production for most of the quarter.
· At the end of the quarter, positive working capital position of $7.4
million and a cash position of $11 million.
· Generation of positive cashflows in Q3 means that the Company is
committing to a further drilling program.
· Subsequent to Q3 2022, the Company also completed two workovers to
the RCE-1 and RCS-1 wells and has tied in the East Pepper well.
Outlook:
· The Company expects to commence drilling, around the end of 2022, the
first of five additional wells - three wells at Rio Cravo and two wells at
Carrizales Norte on the Tapir Block.
· The Company anticipates the robust CAPEX program will be funded from
cash on hand and cashflow from operations.
· Robust operational tempo ensures that the Company is on track to
achieve 3,000 bopd within 18 months of the AIM listing (H1 2023).
· Arrow continues to focus on shareholder value, improving its strong
balance sheet, and free cash flow.
Marshall Abbott, CEO of Arrow Exploration Corp., commented:
"We have initiated the largest capital program in the history of the Company.
Arrow has successfully executed the two workovers with production improving
daily. The plan to add further perforations to RCS‑1 provides additional and
material production increase potential. The RCE infill drilling program will
aid in achieving our 3,000 (net) bopd production target in H1 2023. The low
risk Carrizales Norte project has significant production and reserve
potential. In addition, the West Tapir seismic project is expected to add low
risk exploration prospects, which have the potential to provide material
production and reserves increases in the near term. The seismic project will
highlight the reserves potential of the western section of the Tapir block.
The Company's plans are to explore the east half of the Tapir block with a
second seismic shoot in 2024. The Arrow Team continues to execute our strategy
to increase shareholder value."
Operations Update
Canadian operations
· East Pepper tie-in
o The East Pepper well was put on production October 25, 2022, at 7 Mmcf/d
(1,167 boe/d). As expected, initial production decline was steep and the well
appears to have now stabilized and is producing in excess of 250 boe/d.
o The Company expects typical production declines of 2-3% per month going
forward.
Colombian operations
· RCS-1 and RCE-1 Workovers:
o The workover of RCS-1 and RCE-1 is in progress and the wells are
continuing to clean-up. Due to electrical storms in the area causing power
outages, the clean-up of the wells is taking longer than expected.
o RCS-1, the first well to be worked over, is currently producing at 660
bop/d (gross), 330 bop/d (net) with daily decreases to water cut and
corresponding increases in oil production. Prior to the workover, the well was
producing 330 bop/d (gross).
o RCS-1 has shown a 330 bop/d (gross) increase since the recompletion
procedure. The production gain results in payout of the workover cost in 17
days at current Brent prices.
o An upper unit in the Carbonara 7A was perforated and flowed 330 bop/d
(gross) after stabilizing. Management believes a thin shale barrier bifurcates
the C7A. It is apparent that a thin shale break prevents inflow from the C7A
main sand, which has superior reservoir characteristics akin to RCE-2. Arrow
now plans to perforate the C7A in RCS-1 as it is the highest reservoir in the
pool. The Company expects that RCS-1 should have a comparable flow rate to
RCE-2, where C7A is currently producing 1,025 bop/d (gross) / 512 bop/d (net)
with a flat watercut.
o RCE-1, the second recompletion, is continuing to show a high water-cut as
it cleans-up. Prior to the workover, the C7A was flowing at 110 bop/d
(gross) with a very high watercut. The C7A Stringer was then perforated and is
slowly recovering. Production continues to increase daily, currently at 90-110
bop/d (gross), and watercut continues to decrease daily as the well continues
to clean up.
· RCE-3, RCE-4, and RCE-5 Infill Drilling:
o Operations remain on track for RCE-3 to spud in late December/early
January 2023, and mobilization of the camp facilities is underway. Civil works
on the pad are nearing completion. Subsequent to completion of RCE-3, both
RCE-4 and RCE-5 will follow in sequence.
· Carrizales Norte
o After drilling RCE-3, RCE-4 and RCE-5, the same drilling rig will be moved
to the Carrizales Norte field.
o Currently Arrow is building a road and pad for the Carrizales Norte
field. The road and pads are expected to be completed in mid-February 2023.
o The spud of Carrizales 1 is anticipated to begin in the latter part of Q1
2023 with Carrizales 2 expected to spud immediately thereafter, followed by a
contingent Carrizales 3.
· Tapir Seismic
o The Company has received all commensurate approvals to proceed with the
100 km2 seismic program.
o The Company is permitting and moving equipment and personnel to the
program area on the west side of the Tapir field.
o The estimated cost of the seismic program is $5 million gross ($2.5
million net to Arrow) and is expected to provide multiple prospects beyond
what has been identified on the coarse 2D seismic grid.
o Processing and interpretation of the seismic will take place over Q2 2023
with drilling plans to be pursued in Q4 2023.
This robust operational tempo is expected to see the Company achieve 3,000
bop/d within 18 months of the AIM listing (H1 2023). Furthermore, the
integrated seismic and geological data will provide significant running room
for production growth on the Tapir Block.
Corporate Production
Corporate production in November 2022 to date ranges between 1,900 boe/d and
2,000 boe/d net. Total net production from the Rio Cravo field is 887 bop/d.
Contribution from the workover program continues to increase Rio Cravo's
production. The Pepper Field has been producing approximately 563 boe/d net,
partially curtailed by the facility operator. The two Pepper wells, along
with continuing and expected robust natural gas prices in North America, are
expected to further enhance the value of the Pepper field. Arrow has 23,000
acres of contiguous Montney rights in the Pepper Area.
2022 THIRD QUARTER INTERIM RESULTS
FINANCIAL AND OPERATING HIGHLIGHTS
Three months ended September 30, 2022 Nine months ended September 30, 2022 Three months ended September 30, 2021
(in United States dollars, except as otherwise noted)
Total natural gas and crude oil revenues, net of royalties 7,614,336 16,041,902 1,684,609
Funds flow from operations ((1)) 4,606,124 7,532,918 875,621
Funds flow from operations ((1)) per share -
Basic($) 0.02 0.04 0.01
Diluted ($) 0.00 0.00 0.01
Net income (loss) 2,041,955 (2,621,593) (21,781)
Net income (loss) per share -
Basic ($) 0.01 (0.01) (0.00)
Diluted ($) 0.01 (0.01) (0.00)
Adjusted EBITDA ((1)) 4,664,345 8,036,342 966,234
Weighted average shares outstanding -
Basic 215,967,143 214,687,656 68,674,602
Diluted 288,235,624 276,272,070 68,674,602
Common shares end of period 215,967,143 215,967,143 68,674,602
Capital expenditures 4,836,860 5,562,525 148,528
Cash and cash equivalents 11,376,702 11,376,702 5,465,981
Current Assets 16,870,695 16,870,695 8,644,830
Current liabilities 9,478,383 9,478,383 7,861,123
Working capital ((1)) 7,392,312 7,392,312 783,707
Long-term portion of restricted cash ((2)) 598,192 598,192 485,263
Total assets 46,979,258 46,979,258 25,362,323
Operating
Natural gas and crude oil production, before royalties
Natural gas (Mcf/d) 1,917 2,853 501
Natural gas liquids (bbl/d) 4 5 11
Crude oil (bbl/d) 1,179 730 481
Total (boe/d) 1,503 1,211 575
Operating netbacks ($/boe) ((1))
Natural gas ($/Mcf) $0.88 $1.18 $1.35
Crude oil ($/bbl) $73.69 $70.30 $37.59
Total ($/boe) $56.75 $42.66 $30.73
((1)) Non-IFRS measures - see "Non-IFRS Measures" section within the third
quarter 2022 MD&A
((2)) Long term restricted cash not included in working capital
Discussion of Operating Results
The Company's third quarter 2022 average corporate production was 1,503 boe/d,
a 53% increase when compared to Q2 2022 average production of 980 boe/d. This
increase was largely attributable to the two new wells in the Rio Crave Este
field (RCE-2 and RCS-1), which were in production for most of the quarter.
Arrow's production on a quarterly basis is summarized below:
Average Production Boe/d YTD 2022 Q3 2022 Q2 2022 Q1 2022 Q4 2021 Q3 2021
Oso Pardo 112 104 112 121 123 137
Ombu (Capella) 164 215 97 177 190 193
Rio Cravo Este (Tapir) 454 860 366 136 142 151
Total Colombia 730 1,179 575 434 455 481
Fir, Alberta 83 82 86 73 82 94
Pepper, Alberta 398 242 319 636 181 -
TOTAL (Boe/d) 1,211 1,503 980 1,144 719 575
For the three months ended September 30, 2022, the Company's average
production mix consisted of crude oil and natural gas production in Colombia
of 1,179 bbl/d (2021: 481 bbl/d) and 1,917 Mcf/d (2021: 501 Mcf/d), along with
minor amounts of natural gas liquids, from Arrow's Canadian properties.
Discussion of Financial Results
During Q3 2022 the Company continued to realize strong oil and gas prices, as
summarized below.
Three months ended September 30
2022 2021 Change
Benchmark Prices
AECO ($/Mcf) $3.83 $2.97 29%
Brent ($/bbl) $97.81 $73.23 34%
West Texas Intermediate ($/bbl) $91.65 $70.54 30%
Realized Prices
Natural gas, net of transportation ($/Mcf) $3.16 $2.90 9%
Natural gas liquids ($/bbl) $82.69 $56.03 48%
Crude oil, net of transportation ($/bbl) $90.90 $63.87 42%
Corporate average, net of transport ($/boe)((1)) $73.02 $52.21 40%
( (1)) Non-IFRS measures - see "Non-IFRS Measures" section within the
MD&A
Operating Netbacks
The Company also continued to realize positive operating netbacks, as
summarized below.
Three months ended September 30
2022 2021
Natural Gas ($/Mcf)
Revenue, net of transportation expense $3.16 $2.90
Royalties (0.35) (0.37)
Operating expenses (1.93) (1.18)
Natural Gas operating netback((1)) $0.88 $1.35
Crude oil ($/bbl)
Revenue, net of transportation expense $90.90 $63.87
Royalties (10.97) (5.91)
Operating expenses (6.24) (20.37)
Crude Oil operating netback((1)) $73.69 $37.59
Corporate ($/boe)
Revenue, net of transportation expense $73.02 $52.21
Royalties (8.72) (4.94)
Operating expenses (7.55) (16.54)
Corporate Operating netback((1)) $56.75 $30.73
((1)) Non-IFRS measure
Arrow realized better operating netbacks quarter-over-quarter, increasing to
$56.75/boe in the third quarter of 2022 from $49.18/boe in the second quarter
of 2022. This increase is due to higher crude oil production and better
netbacks from natural gas.
During 2022, the Company incurred $5.6 million of capital expenditures,
primarily in connection with the drilling of the RCE-2 and RCS-1 wells. At the
end of the quarter, Arrow had a positive working capital position of $7.4
million and a cash position of $11 million, which are expected to fund the
Company's expenditure plan for the foreseeable future.
Subsequent to September 30, 2022, the Company completed workovers in its Rio
Cravo Este-1 and Rio Cravo Sur-1 wells to increase production on the Tapir
Block. The Company has also tied in its East Pepper Montney well in Canada.
Civil works are currently underway to start drilling three more wells in Rio
Cravo. The Company has started to move equipment to start shooting 100 km(2)
of seismic in the Tapir block to highlight existing leads and prospects for
drilling initiating in Q4 2023. This acceleration in operational tempo will be
active throughout the balance of 2022 and 2023, funded by cash on hand and
cashflow.
With this significant improvement in the Company's financial performance, the
Company has approved additional compensation to its non-executives' directors
for $210,000 in aggregate which has been paid in Q4 2022.
Colombia Tax Reform
Early in November, Colombia's congress approved some articles of a tax reform
bill that is expected to raise an additional US$4 billion annually for the
next four years, in part through increased taxes on oil and coal. Once in
effect, the new changes seek to fund social projects. At this time, the final
bill has been completed by the Colombian congress and now awaits approval by
the President to be enacted.
There are two main components of the changes that will impact Arrow:
1. Royalties are not going to be tax deductible for income tax purposes.
2. Corporate tax rate will increase contingent on historic prices of
oil.
There will be no impact on Arrow in 2022 as these new tax laws will be
effectively enacted on January 1, 2023. Arrow's investment has created tax
pools currently available in Colombia that, together with future capital
projects, will provide shelter for corporate income taxes. Currently, Arrow
is expecting to invest approximately US$23 million (net) in 2023 on capital
projects in Colombia. The impact of the new tax laws on 2023 tax payable is
currently under review by management.
At this time, Arrow is not considering any changes to the Q1 and Q2 2023
capital program. All future projects' economics are being evaluated in the
light of these changes to the Colombian tax regime.
Overall, when Brent oil prices are low, royalties and taxes will remain low
and the tax reforms will have little effect on Arrow's bottom line. When
Brent oil prices are high and the Company has high netbacks and net income,
the tax liability is expected to increase.
ISSUANCE OF COMMON SHARES AND TOTAL VOTING RIGHTS
Further to its announcement on 7 November 2022 regarding the application to
AIM for a total block admission of 40,000,000 new common shares in the Company
("Common Shares") (the "Block Admission"), the Company provides below a
monthly update to its total voting rights as a result of the exercise of
instruments subject to the Block Admission during November 2022.
As at 28 November 2022, the Company had 217,901,931 Common Shares in issue.
This figure may be used as the denominator for the calculations by which they
will determine if they are required to notify their interest in, or a change
to, their interest in the share capital of the Company under the Financial
Conduct Authority's Disclosure Guidance and Transparency Rules.
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 (Corporate) +44 (0)7711 627449
Rupert Holdsworth Hunt (Broking)
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.
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
Boe/d: Barrels of oil equivalent per day
$/Boe: Dollars per barrel of oil equivalent
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.
MANAGEMENT's DISCUSSION AND ANALYSIS
Three and nine months ended September 30, 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 November 28, 2022 and should be read in conjunction with Arrow's condensed
consolidated financial statements (unaudited) and related notes for the three
and nine months ended September 30, 2022 and 2021. Additional information
relating to Arrow is available under Arrow's profile on www.sedar.com
(http://www.sedar.com) , including Arrow's Audited Consolidated Financial
Statements (the "Annual Financial Statements") for the year ended December 31,
2021 and 2020.
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; Arrow's interest in the OBC
Pipeline (as defined herein) and the consequences thereof; 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 and duration 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; 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 and duration 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
(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.
Working capital is calculated as current assets minus current liabilities;
funds from operations is calculated as cash flows from (used in) operating
activities adjusted to exclude settlement of decommissioning obligations and
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 loss 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.
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 loss and comprehensive loss per share.
A reconciliation of the non-IFRS measures is included as follows:
Three months ended September 30, 2022 Nine months ended September 30, 2022 Three months ended September 30, 2021
(in United States dollars)
Net income (loss) 2,041,955 (2,621,593) (21,781)
Add/(subtract):
Share based payments 110,876 214,712 224,204
Financing costs:
Accretion on decommissioning obligations 54,272 144,247 33,678
Interest 123,394 367,913 173,807
Other 41,075 285,104 76,111
Depreciation and depletion 1,809,340 3,649,932 507,412
Derivative loss (543,659) 4,968,934 -
Income taxes, current and deferred 1,027,093 1,027,093 (27,197)
Adjusted EBITDA ((1)) 4,664,345 8,036,342 966,234
Cash flows provided by operating activities 5,221,497 5,024,604 1,115,071
Minus - Changes in non‑cash working capital balances:
Trade and other receivables 1,097,426 3,448,281 (1,078,909)
Restricted cash (291,841) (134,360) (6,376)
Taxes receivable 58,264 361,267 (119,154)
Deposits and prepaid expenses (171,610) (160,428) (3,732)
Inventory 229,799 458,575 172,316
Accounts payable and accrued liabilities (1,537,411) (1,465,021) 796,405
Funds flow from operations ((1)) 4,606,124 7,532,918 875,621
( (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 September 30, 2022 Nine months ended September 30, 2022 Three months ended September 30, 2021
(in United States dollars, except as otherwise noted)
Total natural gas and crude oil revenues, net of royalties 7,614,336 16,041,902 1,684,609
Funds flow from operations ((1)) 4,606,124 7,532,918 875,621
Funds flow from operations ((1)) per share -
Basic($) 0.02 0.04 0.01
Diluted ($) 0.00 0.00 0.01
Net income (loss) 2,041,955 (2,621,593) (21,781)
Net income (loss) per share -
Basic ($) 0.01 (0.01) (0.00)
Diluted ($) 0.01 (0.01) (0.00)
Adjusted EBITDA ((1)) 4,664,345 8,036,342 966,234
Weighted average shares outstanding -
Basic 215,967,143 214,687,656 68,674,602
Diluted 288,235,624 276,272,070 68,674,602
Common shares end of period 215,967,143 215,967,143 68,674,602
Capital expenditures 4,836,860 5,562,525 148,528
Cash and cash equivalents 11,376,702 11,376,702 5,465,981
Current Assets 16,870,695 16,870,695 8,644,830
Current liabilities 9,478,383 9,478,383 7,861,123
Working capital ((1)) 7,392,312 7,392,312 783,707
Long-term portion of restricted cash ((2)) 598,192 598,192 485,263
Total assets 46,979,258 46,979,258 25,362,323
Operating
Natural gas and crude oil production, before royalties
Natural gas (Mcf/d) 1,917 2,853 501
Natural gas liquids (bbl/d) 4 5 11
Crude oil (bbl/d) 1,179 730 481
Total (boe/d) 1,503 1,211 575
Operating netbacks ($/boe) ((1))
Natural gas ($/Mcf) $0.88 $1.18 $1.35
Crude oil ($/bbl) $73.69 $70.30 $37.59
Total ($/boe) $56.75 $42.66 $30.73
((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 June 30, 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 23,643 100% 23,643
Wapiti Non-operated 1,280 13% 160
Total Canada 33,723 26,961
TOTAL 499,140 253,966
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 License 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 Motney P&NG rights
at Pepper. The 06-26 well (West Pepper) is a horizontal Upper Motney
exploration well that produces natural gas into the Galloway gas plant where
it is processed.
Three months ended September 30, 2022 Financial and Operational Highlights
· Arrow recorded $7,614,336 in revenues (net of royalties) on crude
oil sales of 88,630 bbls, 407 bbls of natural gas liquids ("NGL's") and
176,318 Mcf of natural gas sales;
· Generated funds flow from operations of $4,606,124;
· Adjusted EBITDA was $4,664,345;
· The Company recorded a net income of $2,041,955;
Results of Operations
The Company has increased its production, combined with improved pricing of
energy commodities. During the three and nine months ended September 30, 2022,
the Company increased production at its Tapir block, from the drilling of the
RCE-2 and RCS-1 wells, and its Ombu block, with consistent production in the
Oso Pardo field. Also, the West Pepper well decreased its production during
the three months ended September 30, 2022 due to third party's temporary
processing facility constraints and natural declines. Subsequent to September
2022, the processing facilities constraints at West Pepper have been
progressively resolved.
Average Production by Property
Average Production Boe/d YTD 2022 Q3 2022 Q2 2022 Q1 2022 Q4 2021 Q3 2021
Oso Pardo 112 104 112 121 123 137
Ombu (Capella) 164 215 97 177 190 193
Rio Cravo Este (Tapir) 454 860 366 136 142 151
Total Colombia 730 1,179 575 434 455 481
Fir, Alberta 83 82 86 73 82 94
Pepper, Alberta 398 242 319 636 181 -
TOTAL (Boe/d) 1,211 1,503 980 1,144 719 575
For the three months ended September 30, 2022, the Company's average
production was 1,503 boe/d (2021: 575 boe/d), which consisted of crude oil
production in Colombia at 1,179 bbl/d (2021: 481 bbl/d), and natural gas
production of 1,917 Mcf/d (2021: 501 Mcf/d) and minor amounts of natural gas
liquids from the Company's Canadian properties.
Average Daily Natural Gas and Oil Production and Sales Volumes
Three months ended Nine months ended
September 30 September 30
2022 2021 2022 2021
Natural Gas (Mcf/d)
Natural gas production 1,917 501 2,853 419
Natural gas sales 1,917 501 2,853 419
Realized Contractual Natural Gas Sales 1,917 501 2,853 419
Crude Oil (bbl/d)
Crude oil production 1,179 481 730 308
Inventory movements and other (216) (195) (264) (100)
Crude Oil Sales 963 286 466 208
Corporate
Natural gas production (boe/d) 320 83 475 70
Natural gas liquids(bbl/d) 4 11 5 6
Crude oil production (bbl/d) 1,179 481 730 308
Total production (boe/d) 1,503 575 1,210 384
Inventory movements and other (boe/d) (216) (195) (264) (100)
Total Corporate Sales (boe/d) 1,287 380 946 284
During the three months ended September 30, 2022, the majority of production
was attributed to Colombia, where the Company has two operated properties: Oso
Pardo and Rio Cravo Este, and one non-operated property, Ombu. Production has
also increased in Canada where the Company has one operated (Pepper) and one
non-operated (Fir) producing properties.
Natural Gas and Oil Revenues
Three months ended Nine months ended
September 30 September 30
2021 2021 2021 2021
Natural Gas
Natural gas revenues 557,445 133,413 3,157,296 341,197
NGL revenues 33,621 48,661 119,766 88,363
Royalties (61,267) (20,655) (497,422) (42,986)
Revenues, net of royalties 529,799 161,419 2,779,640 386,574
Oil
Oil revenues 8,056,780 1,678,526 15,013,222 3,478,459
Royalties (972,243) (155,336) (1,750,960) (391,372)
Revenues, net of royalties 7,084,537 1,523,191 13,262,262 3,087,087
Corporate
Natural gas revenues 557,445 133,413 3,157,296 341,197
NGL revenues 33,621 48,661 119,766 88,363
Oil revenues 8,056,780 1,678,526 15,013,222 3,478,459
Total revenues 8,647,846 1,860,600 18,290,284 3,908,019
Royalties (1,033,510) (175,991) (2,248,382) (434,358)
Natural gas and crude oil revenues, net of royalties 7,614,336 1,684,609 16,041,902 3,473,661
Revenue for the three and nine months ended September 30, 2022 was $7.6 and
$16 million, respectively, net of royalties, which represents an increase of
362% and 352%, respectively, when compared to the same periods in 2021. This
significant increase is mainly due to having two additional wells drilled and
producing in Colombia, and the additional natural gas production from the West
Pepper well in Canada.
Average Benchmark and Realized Prices
Three months ended September 30 Nine months ended September 30
2022 2021 Change 2022 2021 Change
Benchmark Prices
AECO ($/Mcf) $3.83 $2.97 29% $4.31 $2.59 66%
Brent ($/bbl) $97.81 $73.23 34% $102.33 $67.97 51%
West Texas Intermediate ($/bbl) $91.65 $70.54 30% $98.15 $65.05 51%
Realized Prices
Natural gas, net of transportation ($/Mcf) $3.16 $2.90 9% $4.05 $2.98 36%
Natural gas liquids ($/bbl) $82.69 $56.03 48% $83.54 $52.56 59%
Crude oil, net of transportation ($/bbl) $90.90 $63.87 42% $91.00 $61.31 48%
Corporate average, net of transport ($/boe)((1)) $73.02 $52.21 40% $61.75 $50.43 22%
The Company realized prices of $73.02 and $61.75 per boe during the three and
nine months ended September 30, 2022 (2021: $52.21 and $50.43 per boe). This
increase is a reflection of improved oil and natural gas prices during 2022.
Operating Expenses
Three months ended September 30 Nine months ended September 30
2022 2021 2022 2021
Natural gas & NGL's 341,156 54,227 1,742,933 183,091
Crude oil 553,004 535,341 1,664,143 1,141,649
Total operating expenses 894,160 589,568 3,407,076 1,324,740
Natural gas ($/Mcf) $1.93 $1.18 $2.24 $1.60
Crude oil ($/bbl) $6.24 $20.37 $10.09 $20.12
Corporate ($/boe)((1)) $7.55 $16.54 $11.50 $17.09
( (1)Non-IFRS measure)
During the three and nine months ended September 30, 2022, Arrow incurred
operating expenses of $894,160 and $3,407,076, respectively, at an average
cost of $7.55 and $11.50 per boe, respectively. Operating expenses per boe
have improved due to increases in production of both crude oil and natural
gas.
Operating Netbacks
Three months ended September 30 Nine months ended September 30
2022 2021 2022 2021
Natural Gas ($/Mcf)
Revenue, net of transportation expense $3.16 $2.90 $4.05 $2.98
Royalties (0.35) (0.37) (0.63) (0.31)
Operating expenses (1.93) (1.18) (2.24) (1.60)
Natural Gas operating netback((1)) $0.88 $1.35 $1.18 $1.07
Crude oil ($/bbl)
Revenue, net of transportation expense $90.90 $63.87 $91.00 $61.31
Royalties (10.97) (5.91) (10.61) (6.90)
Operating expenses (6.24) (20.37) (10.09) (20.12)
Crude Oil operating netback((1)) $73.69 $37.59 $70.30 $34.29
Corporate ($/boe)
Revenue, net of transportation expense $73.02 $52.21 $61.75 $50.43
Royalties (8.72) (4.94) (7.59) (5.61)
Operating expenses (7.55) (16.54) (11.50) (17.09)
Corporate Operating netback((1)) $56.75 $30.73 $42.66 $27.73
( (1))Non-IFRS measure
General and Administrative Expenses (G&A)
Three months ended Nine months ended
September 30 September 30
2022 2021 2022 2021
General & administrative expenses 2,490,114 839,947 5,139,135 3,131,644
Less: G&A capitalized - - - -
G&A recovered from 3(rd) parties (222,735) - (389,765) -
Total operating overhead recovery (222,735) - (389,765) -
Total G&A 2,267,379 $839,947 4,749,370 $3,131,644
G&A per boe $30.74 $23.57 $16.03 $40.41
For the three and nine months ended September 30, 2022, G&A expenses
before recoveries totaled $2,490,114 and $5,139,135, respectively. This
increase is mainly due to increased salaries and performance bonuses paid to
personnel and legal fees during Q3.
Share-based Payments Expense
Three months ended Nine months ended September 30
September 30
2022 2021 2022 2021
Share-based Payments 110,876 224,204 214,712 (326,106)
Share-based payments expense for the three and nine months ended September 30,
2022 totalled $110,876 and $214,712, respectively (2021: $224,204 and income
of $326,106). The share-based payments expense is the result of the
progressive vesting of the options granted to the Company's employees and
consultants, net of cancellations and forfeitures, according to the company's
stock-based compensation plan.
Financing Costs
Three months ended Nine months ended
September 30 September 30
2022 2021 2022 2021
Financing expense paid or payable 164,469 249,918 653,017 674,068
Non-cash financing costs 54,272 33,678 144,247 98,647
Net financing costs 218,741 283,596 797,264 772,715
The finance expense paid or payable represents interest on the promissory note
due to Canacol, as partial payment for the acquisition of Carrao which bears
interest at 15% per annum. The decrease on this financing expense is due to a
reduced outstanding balance outstanding in Canacol's promissory note. In
addition, financing expense includes fees and interest associated with
financing 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.
Loss on Derivative Liability
Three months ended Nine months ended
September 30 September 30
2022 2021 2022 2021
(Gain) loss on Derivative Liability (543,659) - 4,968,934 -
During the three and nine months ended September 30, 2022, the Company
recorded a (gain) loss in derivative liability of ($543,659) and $4,968,934,
respectively, 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 loss.
Depletion and Depreciation
Three months ended Nine months ended
September 30 September 30
2022 2021 2022 2021
Depletion and depreciation 1,809,340 507,412 3,649,932 1,111,124
Depletion and depreciation expense in the three and nine months ended
September 30, 2022 totalled $1,809,340 and $3,649,932, respectively (2021:
$507,412 and $1,111,124). The Company uses the unit of production method and
proved plus probable reserves to calculate depletion expense and this increase
is directly related to an increase in depletable values and production of
crude and natural gas during Q3 2022 compared with 2021.
Other Income
Three months ended Nine months ended
September 30 September 30
2022 2021 2022 2021
Other expense (income) (32,392) (767,215) (52,595) (1,262,139)
The Company reported other income of $32,392 and $52,596 for the three and
nine months ended September 30, 2022, respectively (2021: $767,215 and
$1,262,139). The 2021 amount was generated from the Company's 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.
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 working capital,
excluding non-cash items. 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.
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 and executive management as part of the Company's shares admission
to trade on the AIM Market of the London Stock Exchange plc. This 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, and 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). On November 24,
2021, the Company closed a private placement of C$395,375 for issuance of
3,765,476 new common shares and 1,999,938 warrants.
As at September 30, 2022, the Company's working capital is $7,392,312. During
2021 and 2022, the Company has been favorably impacted by the overall
improvement in energy commodity prices, which has also impacted the Company's
capacity to generate sufficient financial resources to sustain its operations.
This has contributed to the Company's ability to complete financing
transactions in 2021, in the form of fundraisings, from its existing and new
investors and management is confident that additional resources would be
available to the Company to close similar transactions. As at September 30,
2022 the Company's net debt was calculated as follows:
September 30, 2022
Current assets $ 16,870,695
Less:
Accounts payable and accrued liabilities 5,277,761
Promissory Note 3,676,882
Net debt ((1)) $ 7,916,052
((1))Non-IFRS measure
Working Capital
As at September 30, 2022 the Company's working capital was calculated as
follows:
September 30, 2022
Current assets:
Cash $ 11,376,702
Trade and other receivables 4,087,863
Taxes receivable 538,620
Other current assets 867,510
Less:
Accounts payable and accrued liabilities 5,277,759
Income tax payable 485,398
Lease obligation 38,344
Promissory note - short term portion 3,676,882
Working capital((1)) $ 7,392,312
((1))Non-IFRS measure
Debt Capital
The Company currently has $3.5 million in outstanding debt in the form of a
promissory note payable to Canacol and a long-term debt of $31,040. On October
18, 2021, Arrow and Canacol entered into a Seventh Amended and Restated
Promissory Note. The principal amendments are the following:
- 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, which has already occurred;
- 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
The total balance of this promissory note and its interest of $3,557,792 is
presented as a current liability in the interim condensed consolidated
statement of financial position as at June 30, 2022. 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.
Letters of Credit
As at September 30, 2022, the Company had obligations under Letters of Credit
("LC's") outstanding totaling $5.3 million to guarantee work commitments on
exploration blocks and other contractual commitments. Of the total,
approximately $4 million has been guaranteed by Canacol. Under an agreement
with Canacol, Canacol will continue to provide security for the LC's providing
that Arrow uses all reasonable efforts to replace the LC's. In the event the
Company fails to secure the renewal of the LC's underlying the Company's
Agencia Nacional de Hidrocarburos ("ANH") guarantees, or any of them, the ANH
could decide to cancel the underlying E&P 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, 2023
ANH Canacol and Carrao Financial Capacity $1,672,162 December 31, 2022
COR - 39 ANH Canacol Compliance $2,400,000 December 31, 2022
OMBU ANH Carrao Energy Financial Capacity $436,300 April 14, 2023
Total $5,072,356
Share Capital
As at September 30, 2022, the Company had 214,687,656 common shares,
70,063,607 warrants and 18,095,000 stock options outstanding.
CONTRACTUAL OBLIGATIONS
The following table provides a summary of the Company's cash requirements to
meet its financial liabilities and contractual obligations existing at
September 30, 2022:
Less than 1 year 1-3 years Thereafter Total
Promissory Note $ 3,676,882 $ - - $ 3,676,882
Long term debt - 31,040 - 31,040
Exploration and production contracts - 17,800,000 - 17,800,000
$ 3,676,882 $ 17,831,040 - $ 21,507,922
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 June 30, 2022 of $17.8 million. The
Company, in conjunction with its partners, have made applications to cancel
$15.5 million ($5.79 million Arrow's share) in commitments on the Macaya and
Los Picachos blocks. The remaining commitments are expected to be satisfied by
means of seismic work, exploration drilling and farm-outs.
SUMMARY OF THREE MONTHS RESULTS
2022 2021
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
Oil and natural gas sales, net of royalties 3,911,329 3,038,832 1,684,609 941,620 847,432 368,140
7,614,336 5,024,604
Net income (loss) 2,041,955 768,318 (5,431,865) 6,960,035 (21,782) (734,317) (510,405) (7,953,001)
Income (loss) per share -
basic 0.02 0.00 (0.03) 0.04 (0.00) (0.01) (0.01) (0.12)
diluted 0.00 0.00 (0.02) 0.04 (0.00) (0.01) (0.01) (0.12)
Working capital (deficit) 7,392,310 5,594,027 7,657,938 8,006,074 783,707 3,141,217 (2,659,690) (1,932,940)
Total assets 46,979,259 42,670,153 39,914,240 41,195,798 25,362,323 25,948,551 27,684,920 33,532,299
Net capital expenditures 4,836,860 2,777,611 725,665 1,991,163 148,528 (15,378) 97,330 89,198
Average daily production (boe/d) 1,503 980 1,144 712 575 331 242 140
Over the past quarters, the Company's oil and natural gas sales have
fluctuated due to changes in production, movements in the Brent benchmark oil
price and fluctuations in realized oil price differentials. The Company's
production levels in Colombia have been variable, with increases driven by
additional crude oil from the Tapir wells, partially offset by the sale of the
Company's interest in the LLA-23 blocks and natural declines on mature blocks.
Trends in the Company's net income (loss) are also impacted most significantly
by commodity prices, increase in production, financing costs, income taxes,
depletion, depreciation and impairment of oil and gas properties, gains and
losses from risk management activities.
OUTSTANDING SHARE DATA
At November 28, 2022, the Company had the following securities issued and
outstanding:
Number Exercise Price Expiry Date
Common shares 217,901,931 n/a n/a
Warrants 70,063,607 GBP 0.09 Oct. and Nov, 2023
Stock options 1,050,000 CAD$ 1.15 October 22, 2028
Stock options 345,000 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, 2023
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 749,999 CAD $0.26 March 7, 2024
Stock options 749,999 CAD $0.26 March 7, 2025
Stock options 750,002 CAD $0.26 March 7, 2026
OUTLOOK
The first six months of 2022 saw the Company deploy the capital it raised at
the time of its Admission to AIM on a successful two well drilling campaign
at Rio Cravo on the Tapir Block. The better than forecasted results from this
drilling campaign and the subsequent generation of positive cashflows in Q3
means Arrow is pleased to be committing to a further drilling programme.
Accordingly, in Q4 2022, in addition to undertaking the workover of two wells
at Rio Cravo, the Company expects to start drilling up to three further wells
at Rio Cravo and plans a two well program on the Carrizales Norte Structure on
the Tapir Block. The Company has tied in the East Pepper well in Q4 2022,
confirming Arrow remains on target to increase production to 3,000 boe/d
within 18 months of AIM Admission. The Company is able to support the planned
2023 CAPEX program with current cash 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 significant accounting policies is contained in
Note 3 of the audited consolidated financial statements as at and for the
years ended December 31, 2021 and 2020. These accounting policies are subject
to estimates and key judgements about future events, many of which are beyond
Arrow's control.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies is included in of
the audited consolidated financial statements as at and for the years ended
December 31, 2021 and 2020. These accounting policies are consistent with
those of the previous financial year.
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. Please refer to "Risk Factors" in the
MD&A for the year ended December 31, 2021 for a description of the
financial, business and other risk factors affecting the Company which are
available on SEDAR at www.sedar.com
Arrow Exploration Corp.
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and nine months ended September 30, 2022 AND 2021
IN UNITED STATES DOLLARS
(UNAUDITED)
Notice of No Auditor Review of the Interim Condensed Consolidated Financial
Statements
as at and for the three and nine months ended September 30, 2022
Under National Instrument 51-102, Part 4, subsection 4.3 (3)(a), if an auditor
has not performed a review of the interim condensed consolidated financial
statements, they must be accompanied by a notice indicating that an auditor
has not reviewed the financial statements.
The accompanying unaudited interim condensed consolidated financial statements
of the Company have been prepared by and are the responsibility of the
Company's management.
The Company's independent auditor has not performed a review of these
financial statements in accordance with standards established by the Chartered
Professional Accountants of Canada for a review of interim financial
statements by an entity's auditor.
Arrow Exploration Corp.
Interim Condensed Consolidated Statements of Financial Position
In United States Dollars
(Unaudited)
As at Notes September 30, 2022 December 31, 2021
ASSETS
Current assets
Cash $ 11,376,702 $ 10,878,508
Trade and other receivables 4 4,087,863 639,582
Taxes receivable 5 538,620 719,049
Deposits and prepaid expenses 161,872 322,300
Inventory 705,638 247,063
16,870,695 12,806,502
Non-current assets
Deferred income taxes 4,839,785 4,839,785
Restricted cash 3 598,192 732,553
Exploration and evaluation 6 6,964,506 6,964,506
Property and equipment 7 17,706,080 15,852,452
Total Assets $ 46,979,258 $ 41,195,798
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 5,277,759 $ 3,120,777
Income tax payable 485,398 -
Lease obligation 9 38,344 20,258
Promissory note 8 3,676,882 1,659,393
9,478,383 4,800,428
Non-current liabilities
Long-term debt - 31,552
Lease obligation 9 32,676 34,434
Other liabilities 10 177,500 177,500
Deferred income taxes 3,371,935 3,371,936
Decommissioning liability 11 2,831,401 2,470,239
Promissory note 8 - 1,659,393
Derivative liability 12 8,685,960 4,692,203
Total liabilities 24,577,855 17,237,685
Shareholders' equity
Share capital 13 57,301,384 56,698,237
Contributed surplus 1,457,509 1,249,418
Deficit (35,807,399) (33,185,806)
Accumulated other comprehensive loss (550,091) (803,736)
Total shareholders' equity 22,401,403 23,958,113
Total liabilities and shareholders' equity $ 46,979,258 $ 41,195,798
Commitments and contingencies (Note 14)
The accompanying notes are an integral part of these interim condensed
consolidated financial statements.
On behalf of the Board:
signed "Gage Jull"
Director
signed "Maria Charash" Director
Gage
Jull
Maria Charash
Arrow Exploration Corp.
Interim Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss)
In United States Dollars
(Unaudited)
For the three months ended For the nine months ended
September 30 September 30
Notes 2022 2021 2022 2021
Revenue
Oil and natural gas $ 8,647,846 $ 1,860,600 $ 18,290,284 $ 3,908,019
Royalties (1,033,510) (175,991) (2,248,382) (434,358)
7,614,336 1,684,609 16,041,902 3,473,661
Expenses
Operating 894,160 589,568 3,407,076 1,324,740
Administrative 2,267,379 839,947 4,749,370 3,131,644
Listing costs 54,912 - 131,235 -
Share based payments 14 110,876 224,204 214,712 (326,106)
Financing costs:
Accretion 13 54,272 33,678 144,247 98,647
Interest 123,394 173,807 367,913 551,494
Other 41,075 76,111 285,104 122,574
Derivative loss (gain) (543,659) 56,076 4,968,934 15,383
Foreign exchange loss (234,068) 507,412 (229,526) 1,111,124
Depletion and depreciation 1,809,340 - 3,649,932 -
Other expense (income) (32,393) (767,215) (52,595) (1,262,139)
4,545,288 1,733,588 17,636,402 4,767,361
Income (loss) before taxes 3,069,048 (48,979) (1,594,500) (1,293,700)
Income taxes (recovery)
Current 1,027,093 (27,197) 1,027,093 (27,197)
Deferred - - - -
1,027,093 (27,197) 1,027,093 (27,197)
Net income (loss) for the period 2,041,955 (21,782) (2,621,593) (1,266,503)
Other comprehensive income (loss)
Foreign exchange 173,067 (196,464) 253,645 67,093
Net income (loss) and comprehensive income (loss) for the period $ 2,215,022 $ (218,246) $ (2,367,948) $ (1,199,410)
Net income (loss) per share
- basic $ 0.01 $ (0.00) $ (0.01) $ (0.00)
- diluted $ 0.01 $ (0.01) $ (0.01) $ (0.02)
Weighted average shares outstanding
- basic 215,967,143 68,674,602 214,687,656 68,674,602
- diluted 288,235,624 68,674,602 276,272,070 68,674,602
The accompanying notes are an integral part of these interim condensed
consolidated financial statements.
Arrow Exploration Corp.
Interim Condensed Statements of Changes in Shareholders' Equity
In United States Dollars
(Unaudited)
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
Subscription of common shares, net 603,147 - - - 603,147
Options settled in cash - (6,621) - - (6,621)
Net loss for the period - - - (2,621,593) (2,621,593)
Comprehensive income for the period - - 253,645 - 253,645
Share based payments - 214,712 - - 214,712
Balance September 30, 2022 $ 57,301,384 $ 1,457,509 $ (550,091) $ (35,807,399) $ 22,401,403
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
Net loss for the period - - - (1,266,503) (1,266,503)
Comprehensive income for the period
- - 67,093 - 67,093
Share based payments - (326,107) - - (326,107)
Balance September 30, 2021 $ 50,740,292 $ 1,195,738 $ (522,385) $ (40,145,841) $ 11,267,804
The accompanying notes are an integral part of these interim condensed
consolidated financial statements.
Arrow Exploration Corp.
Interim Condensed Consolidated Statements of Cash Flows
In United States Dollars
(Unaudited)
For nine months ended September 30, 2022 2021
Cash flows provided by (used in) operating activities
Net loss $ (2,621,593) $ (1,266,503)
Items not involving cash:
Share based payment 214,712 (326,106)
Depletion and depreciation 3,649,932 1,111,124
Interest on leases 7,932 5,051
Interest on promissory note, net of forgiveness 359,981 546,442
Accretion 144,247 98,647
Foreign exchange (gain) loss (133,342) 88,848
Loss on derivative liability 4,968,934 -
Income tax expense 1,027,093 -
Settlement of decommissioning obligations (77,180) -
Gain in long-term debt forgiveness (7,798) -
Changes in non‑cash working capital balances:
Restricted cash 134,360 262,489
Trade and other receivables (3,448,281) 1,489,818
Taxes receivable (361,267) 40,618
Deposits and prepaid expenses 160,428 (131,315)
Inventory (458,575) (355,011)
Accounts payable and accrued liabilities 1,465,021 (5,147,955)
Cash provided by (used in) operating activities 5,024,604 (3,583,853)
Cash flows used in investing activities
Additions to property and equipment (5,562,525) (230,480)
Changes in non-cash working capital 691,963 (2,173,682)
Cash flows used in investing activities (4,870,562) (2,404,162)
Cash flows provided by (used in) financing activities
Common shares issued 280,072 -
Payment of long-term debt (23,394) -
Lease payments (29,774) (18,290)
Cash flows provided by (used in) financing activities 226,904 (18,290)
Effect of changes in the exchange rate on cash 117,248 (918)
Increase (decrease) in cash 498,194 (6,007,223)
Cash, beginning of period 10,878,508 11,473,204
Cash, end of period 11,376,702 5,465,981
Supplemental information
Interest paid $ - $ -
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
These interim condensed consolidated financial statements (the "Financial
Statements") have been prepared in accordance with International Accounting
Standard ("IAS") 34 Interim Financial Reporting. These Financial Statements
were authorised for issue by the board of directors of the Company on November
28, 2022. They do not contain all disclosures required by International
Financial Reporting Standards ("IFRS") for annual financial statements and,
accordingly, should be read in conjunction with the audited consolidated
financial statements as at December 31, 2021.
These Financial Statements have been prepared on the historical cost basis,
except for financial assets and liabilities recorded in accordance with IFRS
9. The Financial Statements have been prepared using the same accounting
policies and methods as the consolidated financial statements for the year
ended December 31, 2021. In preparing these condensed consolidated financial
statements, the significant judgements made by management in applying the
group's accounting policies and the key sources of estimation uncertainty were
the same as those that applied to the consolidated financial statements for
the year ended December 31, 2021.
3. Restricted Cash
September 30, December 31, 2021
2022
Colombia (i) $ 37,808 $ 53,726
Canada (ii) 560,384 678,827
$ 598,192 $ 732,553
(i) Restricted cash is comprised of a deposit held as
collateral to guarantee abandonment expenditures related to wells in the Tapir
and Oso Pardo blocks.
(ii) Pursuant to Alberta government regulations, the
Company was required to keep a $306,852 (CAD $420,576; 2021: $415,557) 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 $253,533 pertain
to commercial deposits with customers, lease and other deposits held in
Canada.
4. Trade and other receivables
September 30, December 31, 2021
2022
Trade receivables, net of advances $ 2,456,551 $ 252,141
Other accounts receivable 1,631,312 387,441
$ 4,087,863 $ 639,582
5. Taxes receivable
September 30, December 31, 2021
2022
Value-added tax (VAT) credits recoverable $ 32,350 $ 105,827
Income tax withholdings and advances, net 506,270 613,222
$ 538,620 $ 719,049
The VAT recoverable pertains to non-compensated value-added tax credits
originated in Colombia as operational and capital expenditures are incurred.
The Company is entitled to claim for the reimbursement of these VAT credits.
6. Exploration and Evaluation
September 30, December 31, 2021
2022
Balance, beginning of the period $ 6,964,506 $ 6,961,667
Additions, net - 2,839
Balance, end of the period $ 6,964,506 $ 6,964,506
7. 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 5,887,608 50,671 5,938,279
Balance, September 30, 2022 $ 38,048,525 $ 234,156 $ 38,282,681
Accumulated depletion and depreciation and impairment Oil and Gas Properties Right of Use and Other Assets
Total
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 3,616,023 33,909 3,649,932
Balance, September 30, 2022 $ 20,308,168 $ 148,874 $ 20,457,042
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 (428,640) (6,079) (434,719)
Balance September 30, 2022 $ (110,023) $ (9,536) $ (119,559)
Net Book Value
Balance December 31, 2021 $ 15,787,389 $ 65,063 $ 15,852,452
Balance September 30, 2022 $ 17,630,334 $ 75,746 $ 17,706,080
As at September 30, 2022, the Company reviewed its cash-generating units
("CGU") for property and equipment and determined that there were no
indicators of impairment present. 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 Canadian assets 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 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
(loss) for the year ended December 31, 2021. The following table outlines
forecast benchmark prices and exchange rates used in the Company's impairment
test as at December 31, 2021:
Exchange rate AECO Spot Gas
Brent
Year $US / $Cdn US$/Bbl C$/MMBtu
2022 0.80 74.50 3.71
2023 0.80 72.00 3.28
2024 0.80 69.50 2.99
2025 0.80 71.00 3.10
2026 0.80 72.00 3.13
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, 2021. 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% discount rate, which
took into account risks specific to the Colombian CGUs and inherent in the oil
and gas business, and 15% discount rate for its Canadian CGU, and provided the
following recoverable values:
Recoverable Impairment
CGU Amount Reversal
Canada 5,036,655 1,435,201
Tapir 9,147,575 4,182,575
5,617,776
8. Promissory Note
The promissory note was issued to Canacol Energy Ltd. ("Canacol") as partial
consideration in the acquisition of Carrao Energy S.A. from Canacol. The
promissory note bears interest at 15% per annum, was initially due on January
28, 2019 and has been subsequently amended and extended. On October 18, 2021,
Arrow and Canacol entered into a Seventh Amended and Restated Promissory Note
agreement. The principal amendments are the following:
- 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, which has already occurred;
- 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
The total balance of this promissory note and its interest of $3,676,882 is
presented as a current liability in the interim condensed consolidated
statement of financial position as at September 30, 2022. The Company has
granted a general security interest to Canacol for the obligations under the
Promissory Note.
9. 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 (29,774) (24,535)
Interest 7,932 6,506
Effects of movements in foreign exchange rates (6,531) 498
Obligation, end of the period $ 71,020 $ 54,692
Current portion $ 38,344 $ 20,258
Long-term portion 32,676 34,434
$ 71,020 $ 54,692
As at September 30, 2022, the Company has the following future commitments
associated with its office lease obligations:
Less than one year $ 43,781
2 - 5 years 34,053
Total lease payments 77,834
Amounts representing interest over the term (6,814)
Present value of the net obligation 71,020
During 2022, the Company renegotiated its remaining lease agreement to add
space to its leased corporate space and its related future lease obligation.
As a result, the Company increased its right-of-use assets and its lease
obligation in $44,701.
10. Other Liabilities
The other liabilities of the Company relate to an environmental fee in
Colombia that is levied on capital projects. The fee is calculated as 1% of
the project cost. The program is administered by the Colombian National
Authority of Environmental Licences ("ANLA") and is levied on projects that
utilize surface water or deep water wells that may have an impact on the
environment. The funds are generally used in the affected communities for
purposes of land purchases, biomechanical works (e.g. containment walls in
rivers), reforestation, research projects and others. At December 31, 2021 the
Company had provided for $177,500 (December 31, 2020 - $177,500) for the
environmental fee.
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.
September 30, December 31, 2021
2022
Obligation, beginning of the period $ 2,470,239 $ 2,584,907
Change in estimated cash flows - (10,173)
Additions 338,319 -
Payments or settlements (77,180) (237,826)
Accretion expenses 144,247 132,807
Effects of movements in foreign exchange rates (44,224) 524
Obligation, end of the period $ 2,831,401 $ 2,470,239
The obligation was calculated using a risk-free discount rate range of 1.00%
to 2.00% in Canada (2021: 1.00% to 2.00%) and 8.46% in Colombia (2021: 8.46%)
with an inflation rate of 2.0% and 4.5%, respectively (2021: 2.0% and 4.5%).
It is expected that the majority of costs are expected to occur between 2022
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 $4,754,579 (2021: $4,222,717).
12. Derivative liability
Derivative liability includes warrants issued and outstanding as follows:
September 30, 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 15) - - 70,474,768 5,124,985
Issues in private placement (Note 15) - - 1,999,938 149,543
Exercised (2,411,098) (319,871)
Fair value adjustment - 4,313,628 - (582,225)
Balance end of the period 70,063,608 $ 8,686,060 72,474,706 $ 4,692,303
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 September
30, 2022 and December 31, 2021 was estimated using the following assumptions:
September 30, 2022 December 31, 2021
Number outstanding re-valued warrants 70,063,608 72,474,706
Fair value of warrants outstanding £0.1125 £0.048
Risk free interest rate 3.78% 0.50%
Expected life 1.07 years 1.82 years
Expected volatility 150% 160%
The following table summarizes the warrants outstanding and exercisable at
September 30, 2022:
Number of
warrants Exercise price Expiry date
68,934,769 £0.09 October 25, 2023
1,128,839 £0.09 November 23, 2023
70,063,608
13. Share Capital
(a) Authorized: Unlimited number of common shares without par value
(b) Issued:
September 30, December 31,
2022 2021
Common shares Shares Amounts Shares Amounts
Balance beginning of the period 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 14) - - - (5,274,528)
Share-issue costs (iii) - - - (1,162,451)
Issued from warrants exercised 2,411,098 585,222 - -
Issued from options exercised 375,000 17,925 - -
Balance at end of the period 216,175,741 $ 57,301,384 213,389,643 $ 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 Energy Ltd. (Canacol), 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 has closed a
private placement of C$395,375 for issuance of 3,765,476 new common shares and
1,999,938 warrants (see Note 12).
(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, 2021 and 2020 and
changes during the respective periods ended on those dates is presented below:
September 30, 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 4,550,000 $0.27 11,400,000 $0.13
Exercised in shares (375,000) $0.05 - -
Exercised in cash (400,000) $0.05 - -
Expired/Forfeited (2,794,000) $0.12 (1,145,000) $1.04
End of period 18,095,000 $0.21 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
September 30, 2021
October 22, 2018 1,050,000 $1.15 6.07 years Oct. 22, 2028 1,050,000
May 3, 2019 345,000 $0.31 6.59 years May 3, 2029 345,000
March 20, 2020 1,200,000 $0.05 7.47 years March 20, 2030 800,000
April 13, 2020 2,000,000 $0.05 7.54 years April 13, 2030 1,200,000
December 13, 2021 2,983,332 $0.13 0.70 years June 13, 2023 -
December 13, 2021 2,983,332 $0.13 1.70 years June 13, 2024 -
December 13, 2021 2,983,336 $0.13 2.70 years June 13, 2025 -
June 9, 2022 766,665 $0.28 1.19 years December 9, 2023 -
June 9, 2022 766,667 $0.28 2.19 years December 9, 2024 -
June 9, 2022 766,668 $0.28 3.19 years December 9, 2025 -
September 7, 2022 749,999 $0.26 1.44 years March 7, 2024 -
September 7, 2022 749,999 $0.26 2.44 years March 7, 2025 -
September 7, 2022 750,002 $0.26 3.44 years March 7, 2026 -
Total 18,095,000 $0.27 3.23 years 3,395,000
During 2022, the Company recognized an expense of $214,712 (2021 - income of
$326,106) as share based payments expense, with a corresponding decrease in
the contributed surplus account.
14. 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 September 30, 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 September 30, 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.
Letters of Credit
At September 30, 2022, the Company had obligations under Letters of Credit
("LC's") outstanding totaling $5.3 million to guarantee work commitments on
exploration blocks and other contractual commitments. Of the total,
approximately $4.1 million has been guaranteed by Canacol. Under an agreement,
Canacol will continue to provide security for Arrow's Letters of Credit
providing that Arrow uses all reasonable efforts to replace the LC's. 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, 2023
ANH Canacol and Carrao Financial Capacity $1,672,162 December 31, 2022
COR - 39 ANH Canacol Compliance $2,400,000 December 31, 2022
OMBU ANH Carrao Energy Financial Capacity $436,300 April 14, 2023
Total $5,072,356
15. Financial Instruments
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. Currently, the Company does not have any commodity
price contract in place.
(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 production. 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:
September 30, 2022 December 31, 2021
Working capital $ 7,392,312 $ 8,006,074
Non-Current portion of promissory note - (1,659,393)
7,392,312 $ 6,346,681
16. 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 Canadian segment is also considered the corporate segment. The
following tables show information regarding the Company's segments for the
three and nine months ended, and as at, September 30:
Three months ended September 30, 2022 Colombia Canada Total
Revenue:
Oil Sales $ 8,056,780 $ - $ 8,056,780
Natural gas and liquid sales - 591,066 591,066
Royalties (972,243) (61,267) (1,033,510)
Expenses (2,435,749) (2,109,539) (4,545,288)
Income tax (1,027,093) - (1,027,093)
Net income (loss) $ 3,621,695 $ (1,579,740) $ (2,041,955)
Nine months ended September 30, 2022 Colombia Canada Total
Revenue:
Oil Sales $ 15,013,222 $ - $ 15,013,222
Natural gas and liquid sales - 3,277,062 3,277,062
Royalties (1,750,960) (497,422) (2,248,382)
Expenses (5,593,170) (12,043,232) (17,636,402)
Income tax (1,027,093) - (1,027,093)
Net income (loss) $ 6,641,999 $ (9,263,592) $ (2,621,593)
As at September 30, 2022 Colombia Canada Total
Current assets $ 12,900,256 $ 3,970,439 $ 16,870,695
Non-current:
Deferred income taxes 4,839,785 - 4,839,785
Restricted cash 37,808 560,384 598,192
Exploration and evaluation 6,964,506 - 6,964,506
Property and equipment 12,378,156 5,327,924 17,706,080
Total Assets $ 37,120,511 $ 9,858,747 $ 46,979,258
Current liabilities $ 4,622,600 $ 4,855,783 $ 9,478,383
Non-current liabilities:
Other liabilities 177,500 - 177,500
Deferred income taxes 3,371,935 - 3,371,935
Lease obligation - 32,676 32,676
Decommissioning liability 2,296,091 535,310 2,831,401
Derivative liability - 8,685,960 8,685,960
Total liabilities $ 10,468,126 $ 14,109,729 $ 24,577,855
Three months ended September 30, 2021 Colombia Canada Total
Revenue:
Oil Sales $ 1,678,526 $ - $ 1,678,526
Natural gas and liquid sales 182,074 182,074
Royalties 155,336 20,655 175,991
Expenses 636,806 1,096,782 1,733,588
Income taxes (recovery) (27,197) - (27,197)
Net income (loss) $ 913,581 $ (935,363) $ (21,782)
Nine months ended September 30, 2021 Colombia Canada Total
Revenue:
Oil Sales $ 3,478,459 $ - $ 3,478,459
Natural gas and liquid sales - 429,560 429,560
Royalties 391,372 42,986 434,358
Expenses 2,371,656 2,395,705 4,767,361
Income taxes (recovery) (27,197) - (27,197)
Net income (loss) $ 742,628 $ (2,009,131) $ (1,266,503)
As at September 30, 2021
Colombia Canada Total
Current assets $ 5,055,424 $ 3,589,406 $ 8,644,830
Non-current:
Restricted cash 53,726 431,537 485,263
Exploration and evaluation 6,961,667 - 6,961,667
Property and equipment 6,224,873 3,045,690 9,270,563
Total Assets $ 18,295,690 $ 7,066,633 $ 25,362,323
Current liabilities $ 3,023,180 $ 4,837,943 $ 7,861,123
Non-current liabilities:
Other liabilities 177,500 - 177,500
Lease obligation - 39,493 39,493
Decommissioning liability 2,174,968 508,180 2,683,148
Long-term debt - 31,396 31,396
Promissory note - 3,301,860 3,301,860
Total liabilities $ 5,375,648 $ 8,718,872 $ 14,094,519
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