REG - Arrow Exploration - 2021 ANNUAL RESULTS, MD&A AND RESERVES REPORT
26/04/2022 07:16
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RNS Number : 2866J Arrow Exploration Corp. 26 April 2022
This Announcement contains inside information as defined in Article 7 of the
Market Abuse Regulation No. 596/2014 ("MAR"). Upon the publication of this
Announcement, this inside information is now considered to be in the public
domain.
26 April 2022
NOT FOR RELEASE, DISTRIBUTION, PUBLICATION, DIRECTLY OR INDIRECTLY, IN WHOLE
OR IN PART, IN OR INTO OR FROM THE UNITED STATES, AUSTRALIA, JAPAN, THE
REPUBLIC OF SOUTH AFRICA OR ANY OTHER JURISDICTION WHERE TO DO SO MIGHT
CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OR REGULATIONS OF SUCH
JURISDICTION.
Arrow Exploration Corp.
("Arrow" or the "Company")
2021 annual RESULTS, filing of audited financial statements, MD&A and
reserves report
Arrow Exploration Corp. (AIM: AXL ; TSXV: AXL), the high-growth operator with
a portfolio of assets across key Colombian hydrocarbon basins, is pleased to
announce the filing of its Annual Audited Financial Statements and MD&A
for the year and quarter-ended December 31, 2021 and the filing of its 2021
year-end reserve report, which are available on SEDAR (www.sedar.com). All
dollar figures are in U.S. dollars, except as otherwise noted.
Arrow Exploration's Audited Financial Statements together with the notes
related thereto, as well as Arrow's Management's Discussion and Analysis for
the years ended December 31, 2021 and 2020, will be available shortly on
Arrow's website at www.arrowexploration.ca
FINANCIAL AND OPERATING HIGHLIGHTS
Financial and operating highlights for quarter include the following:
Three months ended December 31, 2021 Year ended December 31, 2021 Three months ended December 31, 2020 Year ended December 31, 2020
Total natural gas and crude oil revenues, net of royalties 3,038,832 6,512,493 368,139 5,320,565
Funds flow from (used in) operations ((1)) (403,007) (145,503) (1,535,047) (4,006,609)
Per share - basic ($) and diluted ($) (0.00) (0.00) (0.02) (0.06)
Net income (loss) 6,960,035 5,693,532 (7,953,001) (32,233,092)
Per share - basic ($) and diluted ($) 0.04 0.06 (0.12) (0.47)
Adjusted EBITDA ((1)) 540,642 804,674 (1,210,966) (2,903,782)
Weighted average shares outstanding:
Basic 171,345,885 94,553,391 68,674,602 68,674,602
Diluted 173,035,572 96,243,078 68,674,602 68,674,602
Common shares end of period 213,389,623 213,389,623 68,674,602 68,674,602
Capital expenditures 1,991,163 2,221,643 89,198 889,928
Cash and cash equivalents 10,878,508 10,878,508 11,473,204 11,473,204
Current assets 12,806,502 12,806,502 15,958,652 15,958,652
Current liabilities 4,800,428 4,800,428 17,891,592 17,891,592
Working capital (deficit) ((1)) 8,006,074 8,006,074 (1,932,940) (1,932,940)
Long-term portion of restricted cash ((2)) - - 460,283 460,283
Total assets 41,195,798 41,195,798 33,532,299 33,532,299
Operating
Natural gas and crude oil production, before royalties
Natural gas (Mcf/d) 1,550 704 442 530
Natural gas liquids (bbl/d) - 7 5 6
Crude oil (bbl/d) 455 344 62 367
Total (boe/d) 712 468 140 461
Operating netbacks ($/boe) ((1))
Natural gas ($/Mcf) $1.87 $1.51 $1.05 $0.51
Crude oil ($/bbl) $34.42 $34.35 ($98.26) $2.85
Total ($/boe) $27.35 $27.55 ($39.03) $3.16
((1))Non-IFRS measures - see "Non-IFRS Measures" section within this MD&A
((2))Long term restricted cash not included in working capital
2021 Year-End Reserves
Arrow has also filed, on SEDAR, the Company's Statement of Reserves Data and
Other Oil and Gas Information, Report on Reserves Data by Independent
Qualified Reserves Evaluator, and Report of Management and Directors on Oil
and Gas Disclosure for the year ended December 31, 2021, as required by
section 2.1 of National Instrument 51-101 - Standards of Disclosure for Oil
and Gas Activities (together, the "Reserve Report").
To recap, the Company's Year-End 2021 Company Gross Reserves Highlights
include:
· 3,048 Mboe of Proved Reserves ("1P Reserves");
· 7,421 Mboe of Proved plus Probable Reserves ("2P Reserves");
· 11,541 Mboe of Proved plus Probable plus Possible Reserves ("3P
Reserves")(1);
· 1P Reserves estimated net present value before income taxes of
US$29.4 million calculated at a 10% discount rate;
· 2P Reserves estimated net present value before income taxes of
US$84.1 million calculated at a 10% discount rate; and
· 3P Reserves estimated net present value before income taxes of US$134
million calculated at a 10% discount rate.
Arrow refers readers to the Company's press release of March 30, 2022 for
additional details, as well as to the Reserve Report filed on SEDAR.
Discussion of Operating Results
The Company's Q4 2021 average corporate production was 712 boe/d, an increase
of 137 boe/d compared to Q3 2021 average corporate production of 575 boe/d, or
24%.
The increase in production quarter-over-quarter was largely attributable to
the Canadian operation following the tie-in of the West Pepper well in
Alberta, Canada which was brought into production in December 2021.
The Company's production on a year-to-date, sequential quarterly, and
year-over-year quarterly basis is summarized below.
Average Production by Property (Boe/d) YTD 2021 Q4 2021 Q3 2021 Q2 2021 Q1 2021 Q4 2020
LLA-23 - - - - 7
Oso Pardo 70 123 137 20 - -
Ombu (Capella) 120 190 193 97 - -
Rio Cravo Este (Tapir) 153 142 151 147 174 56
Total Colombia 344 455 481 264 174 62
Fir, Alberta 76 82 94 67 68 78
Pepper, Alberta 46 181 - - - -
TOTAL (Boe/d) 461 719 575 331 242 140
Discussion of Financial Results
During Q4 2021 the Company continued to realize strong oil and gas prices, as
summarized below.
Average Benchmark and Realized Prices
Three months ended Years ended
December 31 December 31
2021 2020 Change 2021 2020 Change
Benchmark Prices
AECO ($/Mcf) $3.89 $2.18 78% $2.91 $1.68 73%
Brent ($/bbl) $79.80 $45.21 77% $70.78 $43.28 64%
West Texas Intermediate ($/bbl) $77.31 $42.73 81% $68.09 $39.65 72%
Realized Prices
Natural gas, net of transportation ($/Mcf) $3.37 $2.48 35% $3.19 $1.84 73%
Natural gas liquids ($/bbl) $56.43 $35.40 59% $54.01 $27.60 96%
Crude oil, net of transportation ($/bbl) $55.50 $46.18 20% $58.62 $38.52 52%
Corporate average, net of transport ($/boe)((1)) $44.15 $29.47 50% $47.37 $33.14 43%
( (1))Non-IFRS measures - see "Non-IFRS Measures" section within the MD&A
The Company also realized strong operating netbacks, as summarized below.
Operating Netbacks
Three months ended Years ended
December 31 December 31
2021 2020 2021 2020
Natural Gas ($/Mcf)
Revenue, net of transportation expense $3.37 $2.48 $3.19 $1.84
Royalties (0.34) (0.17) (0.33) (0.16)
Operating expenses (1.15) (1.26) (1.35) (1.17)
Operating netback((1)) $1.87 $1.05 $1.51 $0.51
Crude oil ($/bbl)
Revenue, net of transportation expense $55.50 $46.18 $58.62 $38.52
Royalties (3.60) (0.46) (5.37) (1.76)
Operating expenses (17.48) (143.98) (18.90) (33.91)
Operating netback((1)) $34.42 ($98.26) $34.35 $2.85
Corporate ($/boe)
Revenue, net of transportation expense $44.15 $29.47 $47.37 33.14
Royalties (2.95) (1.16) (4.31) (1.62)
Operating expenses (13.85) (67.34) (15.51) (28.36)
Operating netback((1)) $27.35 ($39.03) $27.55 $3.16
((1))Non-IFRS measure
The Company experienced a decrease in operating netbacks during Q4 2021 as
compared to Q3 2021, decreasing to $27.35/boe in Q4 2021 from $30.73/boe in Q3
2021. The decrease in operating netbacks is attributable to lower realized
price for crude sales associated with the Company's share in its Ombu/Capella
block in Q4 2021.
The Company incurred capital expenditures during Q4 2021 of $2 million mainly
related to its West Pepper well. At the end of Q4 2021, the Company had a
positive working capital position of $8 million, and a cash position of $10.9
million.
On October 25, 2021, the Company raised approximately £8.8 million (C$15
million), through a placing and subscription for new common shares with new
investors, Canacol Energy Ltd., and executive management (together,
the "Fundraising") and published an AIM Admission Document in connection with
the admission of the enlarged share capital of the Company to trading on the
AIM Market of the London Stock Exchange plc. The Fundraising consisted of the
placement and subscription of 140,949,545 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 C$0.15282
per new common share for 24 months from the AIM admission date (October 25,
2021). The net proceeds of the Fundraising, together with the Company's
existing funds, are expected to be used to drill two wells at Rio Cravo Este,
and will also be deployed in drilling the Carrizales Norte-1 exploration well.
On 24 November 2021, the Company also announced that it had raised C$395,375
on a non-brokered private placement basis through the issuance of 3,765,476
new common shares of no-par value ("Common Shares") on the same terms as the
Fundraising. Investors received one warrant for every two Common Shares,
exercisable for 24 months from the closing date.
For further Information, contact:
Arrow Exploration
Marshall Abbott, CEO +1 403 651 5995
Joe McFarlane, CFO +1 403 818 1033
Arden Partners
Ruari McGirr / Richard Johnson (Corporate) +44 (0)20 7614 5900
Seb Wykeham / Simon Johnson (Broking)
Auctus Advisors
Jonathan Wright (Corporate) +44 (0)7711 627449
Rupert Holdsworth Hunt (Broking)
Camarco (Financial PR)
James Crothers +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 under-exploited, under-explored and
offer high potential growth. The Company's business plan is to expand oil
production from some of Colombia's most active basins, including the Llanos,
Middle Magdalena Valley (MMV) and Putumayo Basin. The asset base is
predominantly operated with high working interests, and the Brent-linked light
oil pricing exposure combines with low royalties to yield attractive potential
operating margins. Arrow's 50% interest in the Tapir Block is contingent on
the assignment by Ecopetrol SA of such interest to Arrow. Arrow's seasoned
team is led by a hands-on executive team supported by an experienced board.
Arrow is listed on the AIM market of the London Stock Exchange and on TSX
Venture Exchange under the symbol "AXL".
Forward-looking Statements
This news release contains certain statements or disclosures relating to Arrow
that are based on the expectations of its management as well as assumptions
made by and information currently available to Arrow which may constitute
forward-looking statements or information ("forward-looking statements") under
applicable securities laws. All such statements and disclosures, other than
those of historical fact, which address activities, events, outcomes, results
or developments that Arrow anticipates or expects may, could or will occur in
the future (in whole or in part) should be considered forward-looking
statements. In some cases, forward-looking statements can be identified by the
use of the words "continue", "expect", "opportunity", "plan", "potential" and
"will" and similar expressions. The forward-looking statements contained in
this news release reflect several material factors and expectations and
assumptions of Arrow, including without limitation, Arrow's evaluation of the
impacts of COVID-19, the potential of Arrow's Colombian and/or Canadian assets
(or any of them individually), the prices of oil and/or natural gas, and
Arrow's business plan to expand oil and gas production and achieve attractive
potential operating margins. Arrow believes the expectations and assumptions
reflected in the forward-looking statements are reasonable at this time but no
assurance can be given that these factors, expectations and assumptions will
prove to be correct.
The forward-looking statements included in this news release are not
guarantees of future performance and should not be unduly relied upon. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause actual results or events to differ materially
from those anticipated in such forward-looking statements. The forward-looking
statements contained in this news release are made as of the date hereof and
the Company undertakes no obligations to update publicly or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise, unless so required by applicable securities laws.
Neither the TSX-V nor its Regulation Services Provider (as that term is
defined in the policies of the TSX-V) accepts responsibility for the adequacy
or accuracy of this release.
Arrow Exploration Corp.
MANAGEMENT's DISCUSSION AND ANALYSIS
YEAR ended DECEMBER 31, 2021
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") as provided by the
management of Arrow Exploration Corp. ("Arrow" or the "Company"), is dated as
of April 25, 2022 and should be read in conjunction with Arrow's annual
consolidated financial statements and related notes for the year ended
December 31, 2021. Additional information relating to Arrow is available under
Arrow's profile on www.sedar.com (http://www.sedar.com) .
Advisories
Basis of Presentation
The condensed consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards ("IFRS"), and all
amounts herein are expressed in United States dollars, unless otherwise noted,
and all tabular amounts are expressed in United States dollars, unless
otherwise noted. Additional information for the Company may be found on
SEDAR at www.sedar.com.
Advisory Regarding Forward‐Looking Statements
This MD&A contains certain statements or disclosures relating to Arrow
that are based on the expectations of its management as well as assumptions
made by and information currently available to Arrow which may constitute
forward-looking statements or information ("forward-looking statements") under
applicable securities laws. All such statements and disclosures, other than
those of historical fact, which address activities, events, outcomes, results
or developments that Arrow anticipates or expects may, could or will occur in
the future (in whole or in part) should be considered forward-looking
statements. In some cases, forward-looking statements can be identified by the
use of the words "believe", "continue", "could", "expect", "likely", "may",
"outlook", "plan", "potential", "will", "would" and similar expressions. In
particular, but without limiting the foregoing, this MD&A contains
forward-looking statements pertaining to the following: the COVID-19 pandemic
and its impact; tax liability; capital management strategy; capital structure;
credit facilities and other debt; performance by Canacol (as defined herein)
and the Company in connection with the Note (as defined herein) and letters of
credit; Arrow's costless collar structure; 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 income (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 December 31, 2021 Year ended December 31, 2021 Three months ended December 31, 2020 Year ended December 31, 2020
(in United States dollars)
Net income (loss) 6,960,035 5,693,532 (7,953,001) (32,233,092)
Add/(subtract):
Share based payments 241,438 (84,668) 906,152 1,169,766
Financing costs:
Accretion on decommissioning obligations 34,160 132,807 62,075 524,477
Interest 246,449 797,943 418,578 238,230
Other (76,358) 46,216 723,710 903,597
Depreciation and depletion 511,813 1,622,937 139,014 2,049,411
Derivative income (467,507) (467,507) - -
Gain on disposition of oil and gas properties - - (1,059,474) (1,059,474)
Impairment (reversal) of oil and gas properties (5,617,776) (5,617,776) - 27,263,110
Income taxes, current and deferred (1,291,612) (1,318,810) 5,551,979 (1,759,807)
Adjusted EBITDA ((1)) 540,642 804,674 (1,210,966) (2,903,782)
Cash flows used in operating activities (922,307) (4,506,160) (905,274) (2,298,094)
Minus - Changes in non‑cash working capital balances:
Trade and other receivables (327,190) (1,817,008) (326,360) (2,255,190)
Restricted cash - (262,489) 262,489 262,489
Taxes receivable (900,017) (940,634) (1,050,973) (689,860)
Deposits and prepaid expenses 113,602 244,917 (86,132) (193,813)
Inventory (137,252) 217,759 (131,013) (148,467)
Accounts payable and accrued liabilities 1,770,157 6,918,112 702,216 1,316,326
Funds flow from (used in) operations ((1)) (403,007) (145,503) (1,535,047) (4,006,609)
((1))Non-IFRS measures
The term barrel of oil equivalent ("boe") is used in this MD&A. Boe may
be misleading, particularly if used in isolation. A boe conversion ratio of
6 thousand cubic feet ("Mcf") of natural gas to one barrel of oil ("bbl") is
used in the MD&A. This conversion ratio of 6:1 is based on an energy
equivalency conversion method primarily applicable at the burner tip and does
not represent a value equivalency at the wellhead.
FINANCIAL AND OPERATING HIGHLIGHTS
Three months ended December 31, 2021 Year ended December 31, 2021 Three months ended December 31, 2020
Year ended December 31, 2020
(in United States dollars, except as otherwise noted)
Total natural gas and crude oil revenues, net of royalties 3,038,832 6,512,493 368,139 5,320,565
Funds flow from (used in) operations ((1)) (403,007) (145,503) (1,535,047) (4,006,609)
Per share - basic ($) and diluted ($) (0.00) (0.00) (0.02) (0.06)
Net income (loss) 6,960,035 5,693,532 (7,953,001) (32,233,092)
Per share - basic ($) and diluted ($) 0.04 0.06 (0.12) (0.47)
Adjusted EBITDA ((1)) 540,642 804,674 (1,210,966) (2,903,782)
Weighted average shares outstanding - basic and diluted:
Basic 171,345,885 94,553,391 68,674,602 68,674,602
Diluted 173,035,572 96,243,078 68,674,602 68,674,602
Common shares end of period 213,389,623 213,389,623 68,674,602 68,674,602
Capital expenditures 1,991,163 2,221,643 89,198 889,928
Cash and cash equivalents 10,878,508 10,878,508 11,473,204 11,473,204
Current assets 12,806,502 12,806,502 15,958,652 15,958,652
Current liabilities 4,800,428 4,800,428 17,891,592 17,891,592
Working capital (deficit) ((1)) 8,006,074 8,006,074 (1,932,940) (1,932,940)
Long-term portion of restricted cash ((2)) - - 460,283 460,283
Total assets 41,195,798 41,195,798 33,532,299 33,532,299
Operating
Natural gas and crude oil production, before royalties
Natural gas (Mcf/d) 1,550 704 442 530
Natural gas liquids (bbl/d) - 7 5 6
Crude oil (bbl/d) 455 344 62 367
Total (boe/d) 712 468 140 461
Operating netbacks ($/boe) ((1))
Natural gas ($/Mcf) $1.87 $1.51 $1.05 $0.51
Crude oil ($/bbl) $34.42 $34.35 ($98.26) $2.85
Total ($/boe) $27.35 $27.55 ($39.03) $3.16
((1))Non-IFRS measures - see "Non-IFRS Measures" section within this MD&A
((2))Long term restricted cash not included in working capital
The Company
Arrow is a junior oil and gas company engaged in the acquisition, exploration
and development of oil and gas properties in Colombia and Western Canada. The
Company's shares trade on the TSX Venture Exchange and the London AIM exchange
under the symbol AXL.
The Company and Arrow Exploration Ltd. entered into an arrangement agreement
dated June 1, 2018, as amended, whereby the parties completed a business
combination pursuant to a plan of arrangement under the Business Corporations
Act (Alberta) ("ABCA") on September 28, 2018. Arrow Exploration Ltd. and Front
Range's then wholly-owned subsidiary, 2118295 Alberta Ltd., were amalgamated
to form Arrow Holdings Ltd., a wholly-owned subsidiary of the Company (the
"Arrangement"). On May 31, 2018, Arrow Exploration Ltd. entered in a share
purchase agreement, as amended, with Canacol Energy Ltd. ("Canacol"), to
acquire Canacol's Colombian oil properties held by its wholly-owned
subsidiary Carrao Energy S.A. ("Carrao"). On September 27, 2018, Arrow
Exploration Ltd. closed the agreement with Canacol.
On May 31, 2018, Arrow Exploration Ltd., entered into a purchase and sale
agreement to acquire a 50% beneficial interest in a contract entered into with
Ecopetrol S.A. pertaining to the exploration and production of hydrocarbons in
the Tapir block from Samaria Exploration & Production S.A. ("Samaria"). On
September 27, 2018, Arrow Exploration Ltd. closed the agreement with Samaria.
As at December 31, 2021 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 65,125 50% 32,563
Oso Pardo Operated 672 100% 672
Ombu Non-operated 56,482 10% 5,648
COR-39 Operated 95,111 100% 95,111
Los Picachos Non-operated 52,772 37.5% 19,790
Macaya Non-operated 195,255 37.5% 73,221
Total Colombia 465,417 227,005
CANADA
Ansell Operated 640 100% 640
Fir Non operated 7,680 32% 2,457
Penhold Non-operated 480 13% 61
Pepper Operated 23,680 100% 23,680
Wapiti Non-operated 1,280 13% 160
Total Canada 33,760 26,998
TOTAL 499,177 254,003
The Company's primary producing assets are located in Colombia in the Tapir,
Oso Pardo and Ombu blocks, with natural gas production in Canada at Fir and
Pepper, Alberta.
Llanos Basin
Within the Llanos Basin, the Company is engaged in the exploration,
development and production of oil within the Tapir block. In the Llanos Basin
most oil accumulations are associated with three-way dip closure against
NNE-SSW trending normal faults and can have pay within multiple reservoirs.
The Tapir block contain large areas not yet covered by 3D seismic, and in
Management's opinion offer substantial exploration upside.
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
During December 2021, the Dalehurst 06-26-52-23W5 well ("West Pepper Well")
located near Edson, Alberta, Canada was brought on stream. Initial stabilized
production rates were 6.2 MMscf/d of natural gas, or over 1,030 boe/d, at
7,214 kPa tubing pressure, 30,048 kPa casing pressure, and with no water
production.
Year ended December 31, 2021 Financial and Operational Highlights
· For the year ended December 31, 2021, Arrow recorded $6,512,493
in revenues, net of royalties, on crude oil sales of 105,759 bbls, 2,685 bbls
of natural gas liquids ("NGL's") and 256,865 Mcf of natural gas sales;
· Funds used in operations of $145,503;
· Adjusted EBITDA was $804,674;
· Net income of $6,512,493;
· Resumed production in its Oso Pardo and Ombu (Capella) blocks in
Colombia at the rate of 130 and 160 bbls/d, respectively (Arrow's share);
· Completed a $12 million financing and its listing at the AIM
exchange in London;
· Brought on production stream the West Pepper well.
Three Months Ended December 31, 2021 Financial and Operational Highlights
· For the three months ended December 31, 2021, Arrow recorded
$3,038,832 in revenues, net of royalties, on crude oil sales of 49,024 bbls,
1,004 bbls of natural gas liquids ("NGL's") and 142,404 Mcf of natural gas
sales, which represents a 100% increase when compared to Q3 2021;
· Funds used in operations of $403,007;
· Adjusted EBITDA for the three months was $540,642;
· Net income of $6,960,035;
· Brought on production stream the West Pepper well.
Annual 2021 Reserve Highlights
· 3,048 Mboe of Proved Reserves, net increase of 118 Mboe compared
to 2020;
· 7,421 Mboe of Proved plus Probable Reserves, net decrease of 387
Mboe;
· Proved reserves estimated net present value, before income taxes,
of US$29 million using a 10% discount rate;
· Proved plus Probable Reserves estimated net present value, before
income taxes, of US$84 million using a 10% discount rate
Results of Operations
The Company has significantly recovered its production and improved its
operations despite the challenges from the Covid-19 pandemic, combined with
improved pricing of energy commodities. These have allowed the Company to
improve its balance sheet and its business profile when compared with 2020.
During 2021, the Company maintained production at its RCE-1 well in the Tapir
block for the whole year, with the Oso Pardo and Ombu blocks coming back on
production stream in June and April, respectively. Also, during December
2021, the West Pepper Well was brought on stream with an average production of
4,162 Mcf/d of gas while active.
On December 30, 2020, the Company closed its previously announced sale of its
LLA-23 block to COG Energy Ltd. for a gross cash consideration of $12.1
million consisted of a firm amount of US$11.75 million plus sale adjustments
agreed within the parties. In addition to receiving the proceeds, Arrow has
transferred to COG its work obligations under various letters of credit in
place to guarantee work commitments on LLA-23, as well as all underlying
decommissioning and environmental liabilities.
Average Production by Property (Boe/d) YTD 2021 Q4 2021 Q3 2021 Q2 2021 Q1 2021 Q4 2020
LLA-23 - - - - 7
Oso Pardo 70 123 137 20 - -
Ombu (Capella) 120 190 193 97 - -
Rio Cravo Este (Tapir) 153 142 151 147 174 56
Total Colombia 344 455 481 264 174 62
Fir, Alberta 76 82 94 67 68 78
Pepper, Alberta 46 181 - - - -
TOTAL (Boe/d) 461 719 575 331 242 140
For the three months and year ended December 31, 2021, the Company's average
production was 461 and 719 boe/d, respectively, which consisted of crude oil
production in Colombia at 455 and 344 bbl/d, natural gas production of 1,550
and 704 Mcf/d, respectively, 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 December 31 Year ended
December 31
2021 2020 2021 2020
Natural Gas (Mcf/d)
Natural gas production 1,550 442 704 530
Natural gas sales 1,550 442 704 530
Realized Contractual Natural Gas Sales 1,550 442 704 530
Crude Oil (bbl/d)
Crude oil production 455 62 344 367
Inventory movements and other 78 (1) (54) (6)
Crude Oil Sales 533 61 290 361
Corporate
Natural gas production (boe/d) 256 73 117 88
Natural Gas Liquids(bbl/d) 0 5 7 6
Crude oil production (bbl/d) 455 62 344 367
Total production (boe/d) 712 140 468 461
Inventory movements and other (boe/d) 78 (1) (54) (6)
Total Corporate Sales (boe/d) 789
139 414
455
During the year and three months ended December 31, 2021 the majority of
production was attributed to Colombia, where all of Company's blocks were
producing. In Canada, the Company has two operated and two non-operated
properties located in the province of Alberta at Fir, Pepper, Harley and
Wapiti.
Natural Gas and Oil Revenues
Three months ended December 31 Year ended
December 31
2021 2020 2021 2020
Natural Gas
Natural gas revenues 479,232 100,931 820,430 356,238
NGL revenues 56,657 17,824 145,019 58,446
Royalties (41,568) (12,417) (84,554) (37,122)
Revenues, net of royalties 494,321 106,338 880,895 377,562
Crude Oil
Crude Oil revenues 2,720,772 264,419 6,199,231 5,179,819
Royalties (176,261) (2,617) (567,633) (236,816)
Revenues, net of royalties 2,544,511 261,802 5,631,598 4,943,003
Three months ended December 31 Year ended
December 31
2021 2020 2021 2020
Corporate
Natural gas revenues 479,232 100,931 820,430 356,238
NGL revenues 56,657 17,824 145,019 58,446
Oil revenues 2,720,772 264,419 6,199,231 5,179,819
Total revenues 3,256,661 383,174 7,164,679 5,594,503
Royalties (217,829) (15,035) (652,187) (273,938)
Natural gas and crude oil revenues, net of royalties, as reported 3,038,832 368,139 6,512,493 5,320,565
Revenues for the three months and the year ended December 31, 2021 was
$3,038,832 and $6,512,493, respectively, net of royalties (2020: $368,139 and
$5,320,565, respectively), which represent an increase of 725% and 22%,
respectively. This increase is mainly due to increased production, combined
with improved pricing for energy commodities.
Average Benchmark and Realized Prices
Three months ended December 31 Years ended
December 31
2021 2020 Change 2021 2020 Change
Benchmark Prices
AECO ($/Mcf) $3.89 $2.18 78% $2.91 $1.68 73%
Brent ($/bbl) $79.80 $45.21 77% $70.78 $43.28 64%
West Texas Intermediate ($/bbl) $77.31 $42.73 81% $68.09 $39.65 72%
Realized Prices
Natural gas, net of transportation ($/Mcf) $3.37 $2.48 35% $3.19 $1.84 73%
Natural gas liquids ($/bbl) $56.43 $35.40 59% $54.01 $27.60 96%
Crude oil, net of transportation ($/bbl) $55.50 $46.18 20% $58.62 $38.52 52%
Corporate average, net of transport ($/boe)((1)) $44.15 $29.47 50% $47.37 $33.14 43%
The Company realized a price of $44.15 and $47.37 per boe during the three
months and year ended December 31, 2021, respectively (2020: $29.47 and
$33.14, respectively) as world oil prices improved during 2021. In Canada,
natural gas prices experienced a sustained increase during the same periods
compared to 2020 levels.
Operating Expenses
Three months ended December 31 Years ended
December 31
2021 2020 2021 2020
Natural gas & NGL's 218,557 51,090 347,421 226,530
Crude oil 1,392,310 824,452 1,998,618 4,560,238
Total operating expenses 1,610,867 875,542 2,346,039 4,786,768
Natural gas ($/Mcf) $1.15 $1.26 $1.35 $1.17
Crude oil ($/bbl) $17.48 $143.98 $18.90 $33.91
Corporate ($/boe)((1)) $13.85 $67.34 $15.51 $28.36
((1)Non-IFRS measure)
During the three months and year ended December 31, 2021, Arrow incurred
operating expenses of $1,610,867 and $2,346,039, respectively (2020: $875,542
and $4,786,768, respectively), at an average cost of $13.85 and $15.51 per boe
(2020: $67.34 and $28.36, respectively) which is reflective of the Company's
increase in production and decrease in operating costs when compared to 2020
levels.
Operating Netbacks
Three months ended December 31 Years ended
December 31
2021 2020 2021 2020
Natural Gas ($/Mcf)
Revenue, net of transportation expense $3.37 $2.48 $3.19 $1.84
Royalties (0.34) (0.17) (0.33) (0.16)
Operating expenses (1.15) (1.26) (1.35) (1.17)
Natural Gas Operating netback((1)) $1.87 $1.05 $1.51 $0.51
Crude oil ($/bbl)
Revenue, net of transportation expense $55.50 $46.18 $58.62 $38.52
Royalties (3.60) (0.46) (5.37) (1.76)
Operating expenses (17.48) (143.98) (18.90) (33.91)
Crude Oil Operating netback((1)) $34.42 ($98.26) $34.35 $2.85
Corporate ($/boe)
Revenue, net of transportation expense $44.15 $29.47 $47.37 33.14
Royalties (2.95) (1.16) (4.31) (1.62)
Operating expenses (13.85) (67.34) (15.51) (28.36)
Corporate Operating netback((1)) $27.35 ($39.03) $27.55 $3.16
((1))Non-IFRS measure
The operating netbacks of the Company have improved significantly in 2021 due
to several factors, such as increasing production from both its Colombian and
Canadian assets , and improved crude oil and natural gas prices.
General and Administrative Expenses (G&A)
Three months ended December 31 Years ended
December 31
2021 2020 2021 2020
General & administrative expenses 1,840,646 1,529,397 4,972,290 4,520,101
G&A recovered from 3(rd) parties (91,177) (198,154) (91,177) (198,154)
Total G&A 1,749,469 1,321,243 4,881,113 4,321,947
G&A per boe $23.72 108.18 $32.27 27.74
For the three months and year ended December 31, 2021, G&A expenses,
before recoveries totaled $1,840,646 and $4,972,290, respectively (2020:
$1,529,397 and $4,520,101, respectively), which represents an increase when
compared to the same periods in 2020. This increase was mainly represented by
increases in office expenses, salaries and compensation, as well as increase
in regulatory and marketing expenses associated with the Company's listing in
the London AIM market. These increases were offset by reductions in legal and
other professional fees.
Listing Costs
Three months ended December 31 Years ended
December 31
2021 2020 2021 2020
Listing costs 583,972 - 583,972 -
For the three months and year ended December 31, 2021, the Company incurred in
listing cost of $583,972 (2020: nil) related to the listing of its shares in
the AIM Market of the London Stock and Exchange.
Share-based Payments Expense
Three months ended December 31 Years ended
December 31
2021 2020 2021 2020
Share-based Payments expense 241,438 906,152 (84,668) 1,169,766
Share-based payments expense for the three months and year ended December 31,
2021 totaled $241,438 and income for $84,668, respectively (2020: $906,152 and
$1,169,766, respectively). During 2021, the Company granted 11,400,000 (2020:
4,319,000) options to its key management personnel, which were offset by
reversal of expenses from cancelled options due to resignations and
terminations of option holders. During 2021 and 2020, the Company also
recognized an increase in its share based payments expense from 13,000,000
phantom shares and 1,681,000 phantom options granted to key management
personnel in 2020, according to the compensation program adopted by the
Company. The share-based payments expense is the result of the progressive
vesting of the options granted to the Company's employees plus the variation
in the fair market value of phantom shares and phantom stock options, net of
cancellations and forfeitures, according to the company's stock-based
compensation plans.
Financing Costs
Three months ended December 31 Years ended
December 31
2021 2020 2021 2020
Financing expense paid or payable 170,091 1,142,288 844,159 1,141,827
Non-cash financing costs 34,160 62,075 132,807 524,477
Net financing costs $204,251 1,204,363 $976,966 1,666,304
The finance expense paid or payable represents mostly interest on the
promissory note due to Canacol, as partial payment for the acquisition of
Carrao Energy. On October 18, 2021, a seventh amended and restated promissory
note was entered into with Canacol which includes that the new principal
amount of the promissory note is $6,026,166, which bares interest at an annual
rate of 15%. On August 3, 2020, Canacol agreed to forgive $918,000 of accrued
interest payable to date in exchange for the Company providing full security
to the Canacol over the shares of its operating subsidiaries in Panama. In
addition, financing expense includes fees and interest associated with
financing of standby letters of credit on certain of the Company's Colombian
blocks, and interest expense on leases. The non-cash finance cost represents
an increase in the present value of the decommissioning obligation for the
current periods. The amount of this expense will fluctuate commensurate with
the asset retirement obligation as new wells are drilled or properties are
acquired or disposed.
Depletion and Depreciation
Three months ended December 31 Years ended
December 31
2021 2020 2021 2020
Depletion and depreciation 511,813 139,014 1,662,937 2,049,411
Depletion and depreciation expense for the three months and year ended
December 31, 2021 totaled $511,813 and $1,662,937, respectively (2020:
$139,014 and $2,049,411, respectively). The Company uses the unit of
production method and proved plus probable reserves to calculate depletion
expense and this decrease is directly related with the sale of LLA-23 in late
2020.
Impairment (reversal) of Oil and Gas Properties
Three months ended December 31 Years ended
December 31
2021 2020 2021 2020
Impairment (reversal) of Oil and Gas Properties (5,617,776) - (5,617,776) 27,263,110
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. As at March 31 2020, the Company reviewed its cash-generating unit's
("CGU") property and equipment and determined that there were indicators of
impairment present related to the decrease in price forecast and reserves. The
Company prepared estimates of both the value in use and fair value less costs
of disposal of its CGUs and it was determined that carrying value of each CGU
not exceeded its recoverable amount and, therefore, an impairment provisions
of $27,263,110 was required.
Gain on Derivative Liability
Three months ended December 31 Years ended
December 31
2021 2020 2021 2020
Gain on Derivative Liability (467,507) - (467,507) -
During 2021, the Company recorded a gain in derivative liability of $467,507
related to the valuation of its outstanding warrants issued during its AIM
listing and private placement completed in 2021. These warrants provide the
right to holders to convert them into common shares at a fixed price set in a
currency different to the Company's functional currency and, therefore, they
are considered a liability and measured at fair value with changes recognized
in the statements of operations and comprehensive income (loss).
Other income
Three months ended December 31 Years ended
December 31
2021 2020 2021 2020
Other income (756,242) (527,282) (2,018,382) (636,229)
The Company reported other income of $756,242 and $2,018,382 for the three
months and year ended December 31, 2021, respectively (2020: $527,282 and
$636,229, respectively). These amounts have been 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, including a reversal of liabilities associated with
the OBC settlement.
Income Taxes
Three months ended December 31 Years ended
December 31
2021 2020 2021 2020
Current income tax expense 176,238 72,979 149,040 64,193
Deferred income tax (recovery)expense (1,467,850) 5,479,000 (1,467,850) (1,824,000)
Total income tax (recovery) expense (1,291,612) 5,551,979 (1,318,810) (1,759,807)
During 2021, the Company recognized a deferred income tax asset of $4,839,785
and a deferred tax liability of $3,371,936 which represents the tax impact of
temporary differences and management's estimation of current tax benefits that
would be realized to compensate future taxable income. As at December 31,
2020, there was no deferred income tax recognized. The Company recognizes
deferred income tax assets to the extent it believes that these assets will
more likely than not be realized. The Company offsets the deferred income tax
assets against the deferred income tax liability when it has the legal right
to do so. In making this determination, the Company considers all available
positive and negative evidence, including the reversal of all existing
temporary differences, projected future taxable income, tax-planning
strategies, and results of recent operations.
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.
As at December 31, 2021, the Company's working capital is $8,066, 074. During
2021, the Company has made a significant effort to improve its working
capital, more specifically its accounts payable, using its proceeds received
from the sale of LLA-23 and additional financial resources provided by its
operations. The overall improvement in energy commodity prices has also
positively impacted the Company's capacity to generate sufficient financial
resources to sustain its operations. These elements have also 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 December 31, 2021 the Company's net debt was calculated as follows:
December 31, 2021
Current assets $ 12,806,502
Less:
Accounts payable and accrued liabilities 3,120,777
Promissory Note - short and long term 3,318,786
Net debt ((1)) $ 6,366,939
((1))Non-IFRS measure
Working Capital
As at December 31, 2021 the Company's working capital was calculated as
follows:
December 31, 2021
Current assets:
Cash and restricted cash $ 10,878,508
Trade and other receivables 639,582
Taxes receivable 719,049
Other current assets 569,363
Less:
Accounts payable and accrued liabilities 3,120,777
Lease obligation 20,258
Promissory note - short term 1,659,393
Working capital ((1)) $ 8,006,074
((1))Non-IFRS measure
Debt Capital
The Company currently has $3.3 million in outstanding debt in the form of a
promissory note payable to Canacol and a long-term debt of $31,552. 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;
- On or before December 31, 2022, the Company shall make a payment
equal to 50% of the total amount outstanding of interest and principal; and
- The remaining balance of principal and interest shall be paid no
later than June 30, 2023
This amendment also provided that, in the event that the Company made the
payment due on October 31, 2021, Canacol agreed to forgive $658,654 for excess
pipeline shipping costs, as a result of the settlement of the OBC pipeline
dispute.
Letters of Credit
At December 31, 2021, the Company had obligations under Letters of Credit
("LC's") outstanding totaling $5.2 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 $643,423 April 14, 2022
ANH Canacol and Carrao Financial Capacity $1,672,162 June 30, 2022
CORE - 39 ANH Canacol Compliance $2,400,000 June 30, 2022
OMBU ANH Carrao Energy Financial Capacity $436,300 April 14, 2022
Total $5,151,885
Share Capital
As at December 31, 2021, the Company had 213,389,643 common shares, 72,474,706
warrants and 17,114,000 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
December 31, 2021:
Less than 1 year 1-3 years Thereafter Total
Promissory Note $ 1,659,393 1,659,393 - 3,318,786
Exploration and production contracts - 17,800,000 - 17,800,000
$ 1,659,393 19,459,393 - 21,118,786
Exploration and Production Contracts
The Company has entered into a number of exploration contracts in Colombia
which require the Company to fulfill work program commitments and issue
financial guarantees related thereto. In aggregate, the Company has
outstanding exploration commitments at December 31, 2021 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.
Oleoducto Bicentenario de Colombia ("OBC") Pipeline
The Company was a party to an agreement with Canacol that entitles it to a
0.5% interest in OBC, which owns a pipeline system intended to link Llanos
basin oil production to the Caño Limon oil pipeline system in Colombia. This
agreement was part of Arrow's acquisition of Carrao from Canacol. The Company
in conjunction with Canacol, notified OBC to transfer title of the shares
currently in the name of Canacol to Arrow. The transfer requires approval by
OBC which at the date of this MD&A had not been received.
Canacol has finally settled a litigation with OBC in relation to ship or pay
obligations with the OBC and after negotiations between the parties involved
were submitted and approved by courts in Colombia. As part of the 7(th)
amendment to the Canacol Promissory Note, the Company has been released from
paying its OBC obligations for $658,654 and from any future ship or pay
obligations between Canacol and the OBC.
SUMMARY OF THREE MONTHS RESULTS
2021 2020
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
Oil and natural gas sales, net of royalties
3,038,832 1,684,609 941,620 847,432 368,140 207,934 896,011 3,848,478
Net income (loss) 6,960,035 (21,782) (734,317) (510,405) (7,953,001) (1,390,746) 3,168,919 (26,058,265)
Income (loss) per share - basic and diluted 0.04 (0.00) (0.01) (0.01) (0.12) (0.02) 0.05 (0.38)
Working capital (deficit) 8,006,074 783,707 3,141,217 (2,659,690) (1,932,940) (11,086,377) (10,158,614) (2,711,756)
Total assets 41,195,798 25,362,323 25,948,551 27,684,920 33,532,299 46,702,911 47,386,940 43,775,967
Net capital expenditures 1,991,163 148,528 (15,378) 97,330 89,198 146,584 180,795 473,351
Average daily production (boe/d) 712 575 331 242 140 105 417 1,159
The Company's oil and natural gas sales have increased during 2021 due to
resuming production in its existing assets, improved in oil and gas prices and
positive fluctuations in realized oil price differentials. The Company's
production levels in Colombia have progressively improved in 2021. Trends in
the Company's net income (loss) are also impacted most significantly by
operating expenses, financing costs, income taxes, depletion, depreciation and
impairment of oil and gas properties, and other income.
OUTSTANDING SHARE DATA
At April 25, 2022, the Company had the following securities issued and
outstanding:
Number Exercise Price Expiry Date
Common shares 214,054,643 n/a n/a
Warrants 72,184,706 GBP 0.09 Oct. and Nov, 2023
Stock options 1,050,000 CAD$ 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 3,799,998 GBP 0.07625 June 13, 2023
Stock options 3,799,998 GBP 0.07625 June 13, 2024
Stock options 3,800,004 GBP 0.07625 June 13, 2025
OUTLOOK
In 2022, the Company is continuing to focus on improving its balance sheet and
free cash flow by optimizing its sources of funds. The Company has also
started its 2022 drilling campaign with at least two follow-up wells at Rio
Cravo Este and potentially drilling the Carrizales Norte-1 well on the Tapir
Block. The Company is also evaluating the tie-in of the East Pepper well in
2022.
On January 30, 2020, the World Health Organization declared the Coronavirus
disease (COVID-19) outbreak a Public Health Emergency of International Concern
and, on March 10, 2020, declared it to be a pandemic. Actions taken around
the world to mitigate the spread of COVID-19, combined with OPEC's initial
plan to increase global supply resulted in significant weakness and volatility
in commodity prices in early 2020. The simultaneous demand and supply shocks
have resulted in significant declines in product demand and pricing in the
latter part of the first quarter and throughout the second and third quarter
of 2020. Commodity prices began to recover in late 2020 and continued that
recovery in early 2021. Although it is impossible to reliably estimate the
impact of COVID-19, and OPEC's policies and the volatile commodities market,
both are anticipated to have material effects on the Company's 2022 financial
results relative to 2021 and 2020.
CRITICAL ACCOUNTING ESTIMATES
A summary of the Company's significant accounting policies is contained in
Note 3 Annual Financial Statements. These accounting policies are subject to
estimates and key judgements about future events, many of which are beyond
Arrow's control. The following is a discussion of the accounting estimates
that are critical to the consolidated financial statements.
Crude oil and natural gas assets - reserves estimates - Arrow retained
independent third-party petroleum engineers to evaluate its crude oil and
natural gas reserves, prepare an evaluation report, and report to the Reserves
Committee of the Board of Directors. The process of estimating crude oil and
natural gas reserves is subjective and involves a significant number of
decisions and assumptions in evaluating available geological, geophysical,
engineering and economic data. These estimates will change over time as
additional data from ongoing development and production activities becomes
available and as economic conditions affecting crude oil and natural gas
prices and costs change. Reserves can be classified as proved, probable or
possible with decreasing levels of likelihood that the reserves will be
ultimately produced.
Reserve estimates are a key input to the Company's depletion calculations and
impairment tests. Property, plant and equipment within each area are depleted
using the unit-of-production method based on proved and probable reserves
using estimated future prices and costs. In addition, the costs subject to
depletion include an estimate of future costs to be incurred in developing
proved and probable reserves. A revision in reserve estimates or future
development costs could result in the recognition of higher depletion charged
to net income.
Under the IFRS, the carrying amounts of property, plant and equipment are
reviewed at each reporting date to determine whether there is any indication
of impairment. If any such indication exists, the estimated recoverable amount
is calculated. For the purpose of impairment testing, assets are grouped
together into the smallest group of assets that generates cash inflows from
continuing use that are largely independent of the cash inflows of other
assets or groups of assets (the "cash-generating unit" or "CGU"). The
recoverable amount of an asset or a CGU is the greater of its value in use and
its fair value less costs to sell. In assessing value in use, the estimated
future cash flows are discounted to their present value using a pre-tax
discount rate that reflects current market assessments of the time value of
money and the risks specific to the asset. Value in use is generally computed
by reference to the present value of the future cash flows expected to be
derived from production of proven and probable reserves. Exploration and
evaluation ("E&E") assets will be allocated to the related CGU's to assess
for impairment, both at the time of any triggering facts and circumstances as
well as upon their eventual reclassification to producing assets (oil and
natural gas interests in property, plant and equipment). An impairment loss is
recognized in income if the carrying amount of an asset or its CGU exceeds its
estimated recoverable amount. Reserve, revenue, royalty and operating cost
estimates and the timing of future cash flows are all critical components of
the impairment test. Revisions of these estimates could result in a write-down
of the carrying amount of crude oil and natural gas properties.
Decommissioning obligations - The Company recognizes the estimated fair value
of the decommission liability in the period in which it is incurred and
records a corresponding increase in the carrying value of the related asset.
The future asset retirement obligation is an estimate based on the Company's
ownership interest in wells and facilities and reflects estimated costs to
complete the abandonment and reclamation as well as the estimated timing of
the costs to be incurred in future periods. Estimates of the costs associated
with abandonment and reclamation activities require judgement concerning the
method, timing and extent of future retirement activities. The capitalized
amount is depleted on a unit-of-production method over the life of the proved
and probable reserves. The liability amount is increased each reporting period
due to the passage of time and this accretion amount is charged to earnings in
the period, which is included as a financing expense. Actual costs incurred on
settlement of the decommissioning liability are charged against the liability.
Judgements affecting current and annual expense are subject to future
revisions based on changes in technology, abandonment timing, costs, discount
rates and the regulatory environment.
Share based payments - Stock options issued to employees and directors under
the Company's stock option plan are accounted for using the fair value method
of accounting for stock-based compensation. The fair value of the option is
recognized as a share-based payment and contributed surplus over the vesting
period of the option. Share based payment is determined on the date of an
option grant using the Black-Scholes option pricing model. The Black-Scholes
pricing model requires the estimation of several variables including estimated
volatility of Arrow's stock price over the life of the option, estimated
option forfeitures, estimated life of the option, estimated risk-free rate and
estimated dividend rate. A change to these estimates would alter the valuation
of the option and would result in a different related share-based payment.
Income taxes - Arrow follows the balance sheet method, providing for temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for taxation purposes.
Current tax is the expect tax payable on the taxable income for the year,
using tax rates enacted or substantially enacted at the reporting period, and
any adjustment to tax payable in respect to previous periods. Tax
interpretations and legislation in which the Company operates are subject to
change. As such, income taxes are subject to measurement uncertainty and
interpretations can impact net income through current tax arising from the
changes in the deferred income tax asset and liabilities.
Provisions and contingencies - The Company recognizes provisions based on an
assessment of its obligations and available information. Any matters not
included as provisions are uncertain in nature and cannot be reasonably
estimated. The Company makes assumptions to determine whether obligations
exist and to estimate the amount of obligations that we believe exist. In
estimating the final outcome of litigation, assumptions are made about factors
including experience with similar matters, past history, precedents, relevant
financial, scientific, and other evidence and facts specific to the matter.
This determines whether a provision or disclosure in the financial statements
is needed.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies is included in Note
3 Annual Financial Statements. These accounting policies are consistent with
those of the previous financial year as described in Note 3 of the Annual
Financial Statements.
DERIVATIVE COMMODITY CONTRACTS
The Company holds various forms of financial instruments. The nature of these
instruments and the Company's operations expose the Company to commodity
price, credit and foreign exchange risks. The Company manages its exposure to
these risks by operating in a manner that minimizes its exposure to the extent
practical. During 2021, the Company did not have any financial derivative
contract in order to manage commodity price risks.
RISKS AND UNCERTAINTIES
The Company is subject to financial, business and other risks, many of which
are beyond its control and which could have a material adverse effect on the
business and operations of the Company. A summary of certain risk factors
relating to our business are disclosed below.
Impact of the COVID-19 Pandemic
Arrow's business, financial condition and results of operations could be
materially and adversely affected by the outbreak of epidemics, pandemics and
other public health crises in geographic areas in which we have operations,
suppliers, customers or employees, including the recent global outbreak of
COVID-19. The recent COVID-19 pandemic, and actions that may be taken by
governmental authorities in response thereto, has resulted, and may continue
to result in, among other things: increased volatility in financial markets
and foreign currency exchange rates; disruptions to global supply chains;
labour shortages; reductions in trade volumes; temporary operational
restrictions and restrictions on gatherings greater than a certain number of
individuals, shelter-in- place declarations and quarantine orders, business
closures and travel bans; an overall slowdown in the global economy; political
and economic instability; and civil unrest. In particular, the COVID-19
pandemic has resulted in, and may continue to result in, a reduction in the
demand for, and prices of, hydrocarbon and other commodities that are closely
linked to Arrow's financial performance, and also increases the risk that
storage for crude oil and refined petroleum products could reach capacity in
geographic locations in which we operate. A prolonged period of decreased
demand for, and prices of, these commodities, and any applicable storage
constraints, could also result in us voluntarily curtailing or shutting in
production and a decrease in our refined product volumes and refinery
utilization rates, which could adversely impact our business, financial
condition and results of operations. Arrow is also subject to risks relating
to the health and safety of our people, as well as the potential for a
slowdown or temporary suspension of our operations in locations impacted by an
outbreak, increased labour and fuel costs, and regulatory changes. Such a
suspension in operations could also be mandated by governmental authorities in
response to the COVID-19 pandemic. This could negatively impact Arrow's
production volumes and revenues for a sustained period of time, which would
adversely impact our business, financial condition and results of operations.
Unstable Oil and Gas Industry
Recent market events and conditions, including demand destruction resulting
from the COVID-19 pandemic, global excess oil and natural gas supply, actions
taken by the Organization of Petroleum Exporting Countries (OPEC), slowing
growth in China and other emerging economies, market volatility and
disruptions in Asia, and sovereign debt levels in various countries, have
caused significant weakness and volatility in commodity prices. These events
and conditions have caused a significant volatility in the valuation of oil
and gas companies and a variable confidence in the oil and gas industry. Lower
commodity prices may also affect the volume and value of the Company's
reserves especially as certain reserves become uneconomic. In addition, in a
low commodity prices environment might affect the Company's cash flow. As a
result, the Company may not be able to replace its production with additional
reserves and both the Company's production and reserves could be reduced on a
year over year basis. Given the current market conditions, the Company may
have difficulty raising additional funds or if it is able to do so, it may be
on unfavourable and highly dilutive terms.
Prices, Markets and Marketing of Crude Oil and Natural Gas
Oil and natural gas are commodities whose prices are determined based on world
demand, supply and other factors, all of which are beyond the control of
Arrow. World prices for oil and natural gas have fluctuated widely in recent
years. Any material decline in prices could result in a reduction of net
production revenue. Certain wells or other projects may become uneconomic as a
result of a decline in world oil prices and natural gas prices, leading to a
reduction in the volume of Arrow's oil and gas reserves. Arrow might also
elect not to produce from certain wells at lower prices. All of these factors
could result in a material decrease in Arrow's future net production revenue,
causing a reduction in its oil and gas acquisition and development activities.
In addition to establishing markets for its oil and natural gas, Arrow must
also successfully market its oil and natural gas to prospective buyers. The
marketability and price of oil and natural gas which may be acquired or
discovered by Arrow will be affected by numerous factors beyond its control.
Arrow will be affected by the differential between the price paid by refiners
for light quality oil and the grades of oil produced by Arrow. The ability of
Arrow to market its natural gas may depend upon its ability to acquire space
on pipelines which deliver natural gas to commercial markets. Arrow will also
likely be affected by deliverability uncertainties related to the proximity of
its reserves to pipelines and processing facilities and related to operational
problems with such pipelines and facilities and extensive government
regulation relating to price, taxes, royalties, land tenure, allowable
production, the export of oil and natural gas and many other aspects of the
oil and natural gas business.
Substantial Capital Requirements; Liquidity
Arrow's cash flow from its production and sales of petroleum and natural gas
may not, at all times be sufficient to fund its ongoing activities. From time
to time, Arrow may require additional financing in order to carry out its oil
and gas acquisition, exploration and development activities. Failure to obtain
such financing on a timely basis could cause Arrow to forfeit its interest in
certain properties, miss certain acquisition opportunities and reduce or
terminate its operations. If Arrow's revenues from its production of petroleum
and natural gas decrease as a result of lower oil and natural gas prices or
otherwise, it may affect Arrow's ability to expend the necessary capital to
replace its reserves or to maintain its production. If Arrow's funds from
operations are not sufficient to satisfy its capital expenditure requirements,
there can be no assurance that additional financing will be available to meet
these requirements or available on terms acceptable to Arrow.
Arrow's lenders will be provided with security over substantially all of the
assets of Arrow. If Arrow becomes unable to pay its debt service charges or
otherwise commits an event of default, such as bankruptcy, these lenders may
foreclose on or sell Arrow's properties. The proceeds of any such sale would
be applied to satisfy amounts owed to Arrow's lenders and other creditors and
only the remainder, if any, would be available to Arrow shareholders. Arrow
monitors and updates its cash projection models on a regular basis which
assists in the timing decision of capital expenditures. Farm-outs of projects
may be arranged if capital constraints are an issue or if the risk profile
dictates that the Company wishes to hold a lesser working interest position.
Equity, if available and if on reasonable terms, may be utilized to help fund
Arrow's capital program.
Access to Capital
Access to capital has become limited during these times of economic
uncertainty. To the extent the external sources of capital become limited or
unavailable. Arrow's ability to make the necessary capital investments to
maintain or expand oil and gas reserves may be impaired.
Risks of Foreign Operations Generally
Most of Arrow's oil and gas properties and operations are located in a foreign
jurisdiction. As such, Arrow's operations may be adversely affected by changes
in foreign government policies and legislation or social instability and other
factors which are not within the control of Arrow, including, but not limited
to, nationalization, expropriation of property without fair compensation,
renegotiation or nullification of existing concessions and contracts, the
imposition of specific drilling obligations and the development and
abandonment of fields, changes in energy policies or the personnel
administering them, changes in oil and natural gas pricing policies, the
actions of national labour unions, currency fluctuations and devaluations,
exchange controls, economic sanctions and royalty and tax increases and other
risks arising out of foreign governmental sovereignty over the areas in which
Arrow's operations are conducted, as well as risks of loss due to civil
strife, acts of war, terrorism, guerrilla activities and insurrections.
Arrow's operations may also be adversely affected by laws and policies of
Colombia and Canada affecting foreign trade, taxation and investment. If
Arrow's operations are disrupted and/or the economic integrity of its projects
is threatened for unexpected reasons, its business may be harmed. Prolonged
problems may threaten the commercial viability of its operations. In addition,
there can be no assurance that contracts, licenses, license applications or
other legal arrangements will not be adversely affected by changes in
governments in foreign jurisdictions, the actions of government authorities or
others, or the effectiveness and enforcement of such arrangements. In the
event of a dispute arising in connection with Arrow's operations in Colombia,
Arrow may be subject to the exclusive jurisdiction of foreign courts or may
not be successful in subjecting foreign persons to the jurisdictions of the
courts of Canada or enforcing Canadian judgments in such other jurisdictions.
Arrow may also be hindered or prevented from enforcing its rights with respect
to a governmental instrumentality because of the doctrine of sovereign
immunity. Accordingly, Arrow's exploration, development and production
activities in Colombia could be substantially affected by factors beyond the
Company's control, any of which could have a material adverse effect on Arrow.
Acquiring interests and conducting exploration and development operations in
foreign jurisdictions often require compliance with numerous and extensive
procedures and formalities. These procedures and formalities may result in
unexpected or lengthy delays in commencing important business activities. In
some cases, failure to follow such formalities or obtain relevant evidence may
call into question the validity of the entity or the actions taken. Management
is unable to predict the effect of additional corporate and regulatory
formalities which may be adopted in the future including whether any such laws
or regulations would materially increase Arrow's cost of doing business or
affect its operations in any area. Arrow believes that management's experience
operating both in Colombia and in other international jurisdictions helps
reduce these risks. In Colombia, the government has a long history of
democracy and an established legal framework that, in Arrow's opinion,
minimizes political risks.
Russia-Ukraine Conflict
On February 24, 2022, Russian military forces launched a full-scale military
invasion of Ukraine. In response, Ukrainian military personal and civilians
are actively resisting the invasion. Many countries throughout the world have
provided aid to the Ukraine in the form of financial aid and in some cases
military equipment and weapons to assist in their resistance to the Russian
invasion. The North Atlantic Treaty Organization ("NATO") has also mobilized
forces to NATO member countries that are close to the conflict as deterrence
to further Russian aggression in the region. The outcome of the conflict is
uncertain and is likely to have wide ranging consequences on the peace and
stability of the region and the world economy. Certain countries including
Canada and the United States, have imposed strict financial and trade
sanctions against Russia and such sanctions may have far reaching effects on
the global economy. In addition, the German government paused the
certification process for the 1,200 km Nord Stream 2 natural gas pipeline that
was built to carry natural gas from Russia to Germany. As Russia is a major
exporter of oil and natural gas, the disruption of supplies of oil and natural
gas from Russia could cause a significant worldwide supply shortage of oil and
natural gas and significantly impact pricing of oil and gas worldwide. A lack
of supply and high prices of oil and natural gas could have a significant
adverse impact on the world economy. The long-term impacts of the conflict and
the sanctions imposed on Russia remain uncertain.
Alternatives to/Changing Demand for Petroleum Products
Fuel conservation measures, alternative fuel requirements, increasing consumer
demand for alternatives to oil and natural gas, and technological advances in
fuel economy and energy generation devices will reduce the demand for crude
oil, natural gas and other liquid hydrocarbons. The Company cannot predict the
impact of changing demand for oil and natural gas products and any major
changes would have a material adverse effect on the Company's business,
financial condition, results of operations and cash flow.
Exploration, Development and Production Risks
Oil and natural gas exploration involves a high degree of risk, for which even
a combination of experience, knowledge and careful evaluation may not be able
to overcome. There is no assurance that expenditures made on future
exploration by Arrow will result in new discoveries of oil or natural gas in
commercial quantities. It is difficult to project the costs of implementing an
exploratory drilling program due to the inherent uncertainties of drilling in
unknown formations, the costs associated with encountering various drilling
conditions such as over-pressured zones, tools lost in the hole and changes in
drilling plans and locations as a result of prior exploratory wells or
additional seismic data and interpretations thereof.
The long-term commercial success of Arrow will depend on its ability to find,
acquire, develop and commercially produce oil and natural gas reserves. No
assurance can be given that Arrow will be able to locate satisfactory
properties for acquisition or participation. Moreover, if such acquisitions or
participations are identified, Arrow may determine that current markets, terms
of acquisition and participation or pricing conditions make such acquisitions
or participations uneconomic.
Future oil and gas exploration may involve unprofitable efforts, not only from
dry wells, but from wells that are productive but do not produce sufficient
net revenues to return a profit after drilling, operating and other costs.
Completion of a well does not assure a profit on the investment or recovery of
drilling, completion and operating costs. In addition, drilling hazards or
environmental damage could greatly increase the cost of operations, and
various field operating conditions may adversely affect the production from
successful wells. These conditions include delays in obtaining governmental
approvals or consents, shut-ins of connected wells resulting from extreme
weather conditions, insufficient storage or transportation capacity or other
geological and mechanical conditions. While diligent well supervision and
effective maintenance operations can contribute to maximizing production rates
over time, production delays and natural reservoir performance declines cannot
be eliminated and can be expected to adversely affect revenue and cash flow
levels to varying degrees.
In addition, oil and gas operations are subject to the risks of exploration,
development and production of oil and natural gas properties, including
encountering unexpected formations or pressures, premature declines of
reservoirs, blow-outs, sour gas releases, fires and spills. Losses resulting
from the occurrence of any of these risks could have a materially adverse
effect on future results of operations, liquidity and financial condition.
Arrow attempts to minimize exploration, development and production risks by
utilizing a technical team with extensive experience to assure the highest
probability of success in its drilling efforts. The collaboration of a team of
seasoned veterans in the oil and gas business, each with a unique expertise in
the various upstream to downstream technical disciplines of prospect
generation to operations, provides the best assurance of competency, risk
management and drilling success. A full cycle economic model is utilized to
evaluate all hydrocarbon prospects. Detailed geological and geophysical
techniques are regularly employed including 3D seismic, petrography,
sedimentology, petrophysical log analysis and regional geological evaluation.
Governmental Regulation
The oil and gas business is subject to regulation and intervention by
governments in such matters as the awarding of exploration and production
interests, the imposition of specific drilling obligations, environmental
protection controls, control over the development and abandonment of fields
(including restrictions on production) and possible expropriation or
cancellation of contract rights, as well as with respect to prices, taxes,
export quotas, royalties and the exportation of oil and natural gas. Such
regulations may be changed from time to time in response to economic or
political conditions. The implementation of new regulations or the
modification of existing regulations affecting the oil and gas industry could
reduce demand for oil and natural gas, increase Arrow's costs and have a
material adverse effect on Arrow.
Credit Exposure
Recent economic conditions have increased the risk that certain counterparties
for the Company's oil and gas sales and our joint venture partners may fail to
pay. Arrow mitigates these increased risks through diversification and a
review process of the credit worthiness of our counterparties. Arrow's policy
to mitigate credit risk associated with product sales is to maintain marketing
relationships with large, established and reputable purchasers that are
considered creditworthy. Arrow has not experienced any collection issues with
its petroleum and natural gas marketers. Joint venture receivables are
typically collected within two to three months of the joint venture bill being
issued to the partner. Arrow attempts to mitigate the risk from joint venture
receivables by obtaining partner approval of significant capital and operating
expenditures prior to expenditure and in certain circumstances may require
cash deposits in advance of incurring financial obligations on behalf of joint
venture partners.
Health, Safety and Environment
All phases of the oil and natural gas business present environmental risks and
hazards and are subject to environmental regulation pursuant to a variety of
federal, provincial/state and local laws and regulations. Environmental
legislation provides for, among other things, restrictions and prohibitions on
spills, releases or emissions of various substances produced in association
with oil and natural gas operations. The legislation also requires that wells
and facility sites be operated, maintained, abandoned and reclaimed to the
satisfaction of applicable regulatory authorities. Compliance with such
legislation can require significant expenditures and a breach of applicable
environmental legislation may result in the imposition of fines and penalties,
some of which may be material. Environmental legislation is evolving in a
manner expected to result in stricter standards and enforcement, larger fines
and liability and potentially increased capital expenditures and operating
costs. The discharge of oil, natural gas or other pollutants into the air,
soil or water may give rise to liabilities to governments and third parties
and may require the Company to incur costs to remedy such discharge.
There are potential risks to the environment inherent in the business
activities of the Company. Arrow has developed and implemented policies and
procedures to mitigate health, safety and environment (HS&E) risks. Arrow
mitigates HS&E risks by maintaining its wells and complying with all
regulations. Regular field inspections are also carried out to ensure that all
field personnel and third party contractors comply with all company and
regulatory guidelines. An action plan has been developed to ensure inactive
wells are suspended properly and abandoned in a timely fashion. The above
noted policies and procedures are designed to protect and maintain the
environment and to ensure that the employees, contractors, subcontractors and
the public at large are kept safe at all times.
Foreign Exchange and Currency Risks
The Company is exposed to foreign exchange and currency risk as a result of
fluctuations in exchange rates between Colombian peso and the Canadian dollar.
Most of the Corporation's revenues and funds from financing activities are
expected to be received in reference to US dollar denominated prices while a
portion of its operating, capital, and general and administrative costs are
denominated in the Colombian peso and the Canadian dollar.
Widespread Pandemic
The Company's foreign operations are located in areas relatively remote from
local towns and villages and represent a concentration of personnel working
and residing in close proximity to one another. Should an employee or visitor
become infected with a serious illness that has the potential to spread
rapidly, this could place Arrow's workforce at risk. The 2020 outbreak of the
novel coronavirus (COVID-19) in China and other countries around the world is
one example of such an illness. The Corporation takes every precaution to
strictly follow industrial hygiene and occupational health guidelines. There
can be no assurance that this virus or another infectious illness will not
impact the Corporation's personnel and ultimately its operations.
Competition
Arrow actively competes for reserve acquisitions, exploration leases, licenses
and concessions and skilled industry personnel with a substantial number of
other oil and gas companies, many of which have significantly greater
financial and personnel resources than Arrow. Arrow's competitors include
major integrated oil and natural gas companies and numerous other independent
oil and natural gas companies and individual producers and operators.
Certain of Arrow's customers and potential customers are themselves exploring
for oil and natural gas, and the results of such exploration efforts could
affect Arrow's ability to sell or supply oil or gas to these customers in the
future. Arrow's ability to successfully bid on and acquire additional property
rights, to discover reserves, to participate in drilling opportunities and to
identify and enter into commercial arrangements with customers will be
dependent upon developing and maintaining close working relationships with its
future industry partners and joint operators and its ability to select and
evaluate suitable properties and to consummate transactions in a highly
competitive environment.
Social License to Operate
Heightened public monitoring and regulation of hydrocarbon resource producers,
refiners, distributors and commercial/retail sellers, especially where their
activities carry the potential for having negative impacts on communities and
the environment, involves varying degrees of risk to the Company's reputation,
relations with landowners and regulators, and in extreme cases even the
ability to operate. Arrow maintains an active website that complies with
Exchange requirements for timely disclosure and together with its press
releases and other SEDAR filings, is the primary means of communicating to the
general public. While media attention and public perception remains largely
beyond the control of Arrow's executive, employees, contractors and directors,
the Company makes every effort in its corporate and field operations to engage
all stakeholders in a respectful and transparent manner.
Internal Controls over Financial Reporting
The CEO and CFO, along with participation from other members of management,
are responsible for establishing and maintaining adequate Internal Control
over Financial Reporting ("ICFR") to provide reasonable assurance regarding
the reliability of financial statements prepared in accordance with IFRS. The
Company's CEO and CFO, with support of management have assessed the design and
operating effectiveness of the Corporation's ICFR as at December 31, 2021
based on criteria described in "Internal Control - Integrated Framework"
issued in 2013 by the Committee of Sponsoring Organization of the Treadway
Commission. Based on this assessment, it was concluded that the design and
operation of the Corporation's ICFR are effective as at December 31, 2021.
During the three months ended December 31, 2021, there has been no change in
the Corporation's ICFR that has materially affected, or is reasonably likely
to materially affect, the Corporation's ICFR.
Arrow Exploration Corp.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ended DECEMBER 31, 2021 AND 2020
IN UNITED STATES DOLLARS
Independent Auditor's Report
To the Shareholders of Arrow Exploration Corp.
Opinion
We have audited the consolidated financial statements of Arrow Exploration
Corp. (the "Company"), which comprise the consolidated statements of financial
position as at December 31, 2021 and 2020, and the consolidated statements of
operations and comprehensive income (loss), changes in shareholders' equity
and cash flows for the years then ended, and notes to the consolidated
financial statements, including a summary of significant accounting policies
(collectively referred to as the "financial statements").
In our opinion, the accompanying financial statements present fairly, in all
material respects, the financial position of the Company as at December 31,
2021 and 2020, and its financial performance and its cash flows for the years
then ended in accordance with International Financial Reporting Standards
("IFRS").
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing
standards ("Canadian GAAS"). Our responsibilities under those standards are
further described in the Auditor's Responsibilities for the Audit of the
Financial Statements section of our report. We are independent of the Company
in accordance with the ethical requirements that are relevant to our audit of
the financial statements in Canada, and we have fulfilled our other ethical
responsibilities in accordance with these requirements. We believe that the
audit evidence we have obtained is sufficient and appropriate to provide a
basis for our opinion.
Other Information
Management is responsible for the other information. The other information
comprises Management's Discussion and Analysis.
Our opinion on the financial statements does not cover the other information
and we do not and will not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility
is to read the other information identified above and, in doing so, consider
whether the other information is materially inconsistent with the financial
statements or our knowledge obtained in the audit, or otherwise appears to be
materially misstated.
We obtained Management's Discussion and Analysis prior to the date of this
auditor's report. If, based on the work we have performed on this other
information, we conclude that there is a material misstatement of this other
information, we are required to report that fact in this auditor's report. We
have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the
Financial Statements
Management is responsible for the preparation and fair presentation of the
financial statements in accordance with IFRS, and for such internal control as
management determines is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or
error.
In preparing the financial statements, management is responsible for assessing
the Company's ability to continue as a going concern, disclosing, as
applicable, matters related to going concern and using the going concern basis
of accounting unless management either intends to liquidate the Company or to
cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company's
financial reporting process.
Auditor's Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to
fraud or error, and to issue an auditor's report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with Canadian GAAS will always detect a
material misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in the aggregate, they
could reasonably be expected to influence the economic decisions of users
taken on the basis of these financial statements.
As part of an audit in accordance with Canadian GAAS, we exercise professional
judgment and maintain professional skepticism throughout the audit. We also:
• Identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error, design and perform audit
procedures responsive to those risks, and obtain audit evidence that is
sufficient and appropriate to provide a basis for our opinion. The risk of not
detecting a material misstatement resulting from fraud is higher than for one
resulting from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the
audit in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control.
• Evaluate the appropriateness of accounting policies used and
the reasonableness of accounting estimates and related disclosures made by
management.
• Conclude on the appropriateness of management's use of the
going concern basis of accounting and, based on the audit evidence obtained,
whether a material uncertainty exists related to events or conditions that may
cast significant doubt on the Company's ability to continue as a going
concern. If we conclude that a material uncertainty exists, we are required to
draw attention in our auditor's report to the related disclosures in the
financial statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained up to the
date of our auditor's report. However, future events or conditions may cause
the Company to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of
the financial statements, including the disclosures, and whether the financial
statements represent the underlying transactions and events in a manner that
achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the
financial information of the entities or business activities within the
Company to express an opinion on the financial statements. We are responsible
for the direction, supervision and performance of the group audit. We remain
solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other
matters, the planned scope and timing of the audit and significant audit
findings, including any significant deficiencies in internal control that we
identify during our audit.
We also provide those charged with governance with a statement that we have
complied with relevant ethical requirements regarding independence, and to
communicate with them all relationships and other matters that may reasonably
be thought to bear on our independence, and where applicable, related
safeguards.
The engagement partner on the audit resulting in this independent auditor's
report is David Langlois.
/s/ Deloitte LLP
Chartered Professional Accountants
Calgary, Alberta
April 25, 2022
Arrow Exploration Corp.
Consolidated Statements of Financial Position
In United States Dollars
As at Notes December 31, 2021 December 31, 2020
ASSETS
Current assets
Cash $ 10,878,508 $ 11,473,204
Restricted cash 4 - 262,489
Trade and other receivables 5 639,582 2,456,590
Taxes receivable 6 719,049 1,659,683
Deposits and prepaid expenses 322,300 77,382
Inventory 247,063 29,304
12,806,502 15,958,652
Non-current assets
Deferred income taxes 16 4,839,785 -
Restricted cash 4 732,553 460,283
Exploration and evaluation 7 6,964,506 6,961,667
Property and equipment 8 15,852,452 10,151,697
Total Assets $ 41,195,798 $ 33,532,299
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 3,120,777 $ 12,101,989
Lease obligation 10 20,258 17,279
Promissory note 9 1,659,393 5,772,324
4,800,428 17,891,592
Non-current liabilities
Long-term debt 11 31,552 31,416
Lease obligation 10 34,434 53,563
Other liabilities 12 177,500 177,500
Deferred income taxes 16 3,371,936
Decommissioning liability 13 2,470,239 2,584,907
Promissory note 9 1,659,393 -
Derivative liability 14 4,692,203 -
Total liabilities 17,237,685 20,738,978
Shareholders' equity
Share capital 15 56,698,237 50,740,292
Contributed surplus 1,249,418 1,521,845
Deficit (33,185,806) (38,879,338)
Accumulated other comprehensive loss (803,736) (589,478)
Total shareholders' equity 23,958,113 12,793,321
Total liabilities and shareholders' equity $ 41,195,798 $ 33,532,299
Commitments and contingencies (Note 17)
The accompanying notes are an integral part of these consolidated financial
statements.
On behalf of the Board:
signed "Gage Jull"
Director
signed "Maria Charash" Director
Gage
Jull
Maria Charash
Arrow Exploration Corp.
Consolidated Statements of Operations and Comprehensive Income (Loss)
In United States Dollars
For the years ended December 31, Notes 2021 2020
Revenue
Oil and natural gas 20 $ 7,164,680 $ 5,594,503
Royalties 20 (652,187) (273,938)
6,512,493 5,320,565
Expenses
Operating 2,346,039 4,786,768
Administrative 4,881,113 4,321,947
Listing costs 15 583,972 -
Share based payments 15 (84,668) 1,169,766
Financing costs:
Accretion 13 132,807 524,477
Interest 9 797,943 238,230
Other 46,217 903,597
Foreign exchange gain (84,924) (248,139)
Depletion and depreciation 8 1,622,937 2,049,411
Impairment (reversal) of oil and gas properties 8 (5,617,776) 27,263,110
Gain on the disposal of oil and gas properties 8 - (1,059,474)
Gain on derivative liability 14 (467,507) -
Other income (2,018,382) (636,229)
2,137,771 39,313,464
Income (loss) before income tax 4,374,722 (33,992,899)
Income tax expense (recovery)
Current 16 149,040 64,193
Deferred 16 (1,467,850) (1,824,000)
(1,318,810) (1,759,807)
Net income (loss) 5,693,532 (32,233,092)
Other comprehensive loss
Foreign exchange (214,258) (48,085)
Net income (loss) and comprehensive income (loss) $ 5,479,274 $ (32,281,177)
Earnings (loss) per share
- basic and diluted $ 0.06 $ (0.47)
Weighted average shares outstanding
Basic 94,553,391 68,674,602
Diluted 96,243,078 68,674,602
The accompanying notes are an integral part of these consolidated financial
statements.
Arrow Exploration Corp.
Statements of Changes in Shareholders' Equity
In United States Dollars
Accumulated other comprehensive loss
Share Capital Contributed Surplus
Deficit Total Equity
Balance January 1, 2021 $ 50,740,292 $ 1,521,845 $ (589,478) $ (38,879,338) $ 12,793,321
Subscription of common shares, net 5,957,945 - - - 5,957,945
Net income for the year - - - 5,693,532 5,693,532
Comprehensive loss for the year - - (214,258) - (214,258)
Share based payments - (272,427) - - (272,427)
Balance December 31, 2021 $ 56,698,237 $ 1,249,418 $ (803,736) $ (33,185,806) $ 23,958,113
Accumulated other comprehensive loss
Share Capital Contributed Surplus
Deficit Total Equity
Balance January 1, 2020 $ 50,740,292 $ 1,603,788 $ (541,393) $ (6,646,246) $ 45,156,441
Net loss for the year - - - (32,233,092) (32,233,092)
Comprehensive loss for the year - - (48,085) - (48,085)
Share based payments - (81,943) - - (81,943)
Balance December 31, 2020 $ 50,740,292 $ 1,521,845 $ (589,478) $ (38,879,338) $ 12,793,321
The accompanying notes are an integral part of these consolidated financial
statements.
Arrow Exploration Corp.
Consolidated Statements of Cash Flows
In United States Dollars
For the year ended December 31, 2021 2020
Cash flows used in operating activities:
Net income (loss) $ 5,693,532 $ (32,233,092)
Items not involving cash:
Deferred taxes (1,467,850) (1,824,000)
Share based payment (272,427) 1,169,766
Depletion and depreciation 1,622,937 2,049,411
Impairment (reversal) of oil and gas properties (5,617,776) 27,263,110
Interest on leases 6,506 15,435
Interest on promissory note, net of forgiveness 657,953 (69,317)
Accretion 132,807 524,477
Foreign exchange (gain) loss (195,852) 176,166
Gain on change in leases - (19,091)
Gain on the disposal of oil and gas properties - (1,059,474)
Gain on derivative liability (467,507) -
Payment of asset decommissioning obligations (237,826) -
Changes in non‑cash working capital balances:
Restricted cash 262,489 (262,489)
Trade and other receivables 1,817,008 2,255,190
Taxes receivable 940,634 689,860
Deposits and prepaid expenses (244,917) 193,814
Inventory (217,759) 148,467
Accounts payable and accrued liabilities (6,918,112) (1,316,327)
Cash used in operating activities (4,506,160) (2,298,094)
Cash flows (used in) provided by investing activities:
Additions to exploration and evaluation assets (2,840) -
Additions to property and equipment (1,708,706) (889,928)
Proceeds on the sale of property and equipment - 12,113,738
Changes in restricted cash (272,271) -
Changes in non-cash working capital (2,063,099) 1,551,785
Cash flows (used in) provided by investing activities (4,046,916) 12,775,595
Cash flows provided by (used in) financing activities:
Subscription of common shares, net of costs 11,232,473 -
Payment of promissory note (3,111,491) -
Lease payments (24,535) (59,992)
Increase in short-term loan - 500,000
Payment of short-term loan - (500,000)
Increase in long-term debt - 30,942
Cash flows provided by (used in) financing activities 8,096,447 (29,050)
Effect of changes in the exchange rate on cash (138,067) (60,902)
Increase (decrease) in cash (594,696) 10,387,549
Cash, beginning of period 11,473,204 1,085,655
Cash, end of period 10,878,508 11,473,204
Supplemental information
Interest paid $ 336,804 $ 71,709
Taxes paid $ - $ -
The accompanying notes are an integral part of these consolidated financial
statements.
Arrow Exploration Corp.
Notes to the Consolidated Financial Statements
In United States Dollars
December 31, 2021
__________________________________________________________________________________________
1. Corporate Information
Arrow Exploration Corp. ("Arrow" or "the Company") is a public junior oil and
gas company engaged in the acquisition, exploration and development of oil and
gas properties in Colombia and in Western Canada. The Company's shares trade
on the TSX Venture Exchange and the AIM Market of the London Stock Exchange
plc under the symbol AXL. The head office of Arrow is located at 550, 333 -
11th Ave SW, Calgary, Alberta, Canada, T2R 1L9 and the registered office is
located at 1600, 421 - 7th Avenue SW, Calgary, Alberta, Canada, T2P 4K9.
2. Basis of Presentation
Statement of compliance
The Company prepares its consolidated financial statements in accordance with
International Financial Reporting Standards ("IFRS") as issued by the
International Accounting Standards Board (IASB). The consolidated financial
statements have been approved and authorized for issuance by the Board of
Directors ("the Board") on April 25, 2022.
Basis of measurement
These consolidated financial statements have been prepared on a historical
cost basis except for certain financial instruments that have been measured at
fair value and specifically noted within the notes to these consolidated
financial statements.
Functional and presentation currency
These consolidated financial statements are presented in United States
Dollars. The Canadian Dollar is the functional currency of the Company and its
wholly own subsidiary Arrow Holdings Ltd. (AHL). The functional currency of
the Company's subsidiaries operating in Colombia and Panama is the United
States Dollar.
Monetary assets and liabilities denominated in foreign currencies are
translated to the functional currency at the period-end exchange rate.
Non-monetary assets, liabilities, revenues and expenses are translated at
exchange rates at the transaction date. Exchange gains or losses are included
in the determination of net income or loss in the consolidated statements of
operations and comprehensive income (loss).
Use of estimates and judgments
The preparation of consolidated financial statements requires management to
make estimates and use judgment regarding the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as at the
date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. By their nature, estimates are subject
to measurement uncertainty and changes in such estimates in future periods
could require a material change in the financial statements. Accordingly,
actual results may differ from the estimated amounts as future confirming
events occur.
Significant estimates and judgments made by management in the preparation of
these financial statements are as follows:
Exploration and evaluation assets
Exploration and evaluation assets require judgment as to whether future
economic benefits exist, including the existence of proven or probable
reserves and the ability to finance exploration and evaluation projects, where
technical feasibility and commercial viability has not yet been determined.
Depletion and depreciation
The amounts recorded for depletion and depreciation are based on estimates of
proved and probable reserves. Assumptions that are valid at the time of
reserve estimation may change materially as new information becomes
available. Changes in forward price estimates, production and future
development costs, recovery rates or decommissioning costs may change the
economic status of reserves and may ultimately result in reserves used for
measurement purposes being removed from similar calculations in future
reporting periods.
Cash Generating Unit ("CGU")
IFRS requires that the Company's oil and natural gas properties be aggregated
into CGUs, based on their ability to generate largely independent cash flows,
which are used to assess the properties for impairment. The determination of
the Company's CGUs is subject to management's judgment.
Impairment of Property, plant and equipment and exploration and evaluation
assets
Indicators of impairment are assessed by management using judgment,
considering future plans, market conditions and commodity prices. In assessing
the recoverability, each CGU's carrying value is compared to its recoverable
amount, defined as the greater of its fair value less costs of disposal and
value in use. In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific
to the asset.
Decommissioning obligations
Measurement of the Company's decommissioning liability involves estimates as
to the cost and timing of incurrence of future decommissioning programs. It
also involves assessment of appropriate discount rates, rates of inflation
applicable to future costs and the rate used to measure the accretion charge
for each reporting period. Measurement of the liability also reflects
current engineering methodologies as well as current and expected future
environmental legislation and standards.
Income taxes
The Company recognises deferred tax assets to the extent that it is probable
that the deductible temporary differences will reverse in the foreseeable
future and that sufficient taxable income will be generated in the future to
recover such deferred tax assets. Assessing the recoverability of deferred tax
assets requires the Company to make significant estimates related to
expectations of future taxable income. Estimates of future taxable income are
based on forecast cash flows from operations and the application of existing
tax laws. To the extent that future cash flows and taxable income differ
significantly from estimates, the ability of the Company to realise the net
deferred tax assets recorded at the reporting date could be impacted. In
addition, future changes in tax laws could limit the ability of the Company to
obtain tax deductions in future periods.
Provisions and contingencies
The Company recognizes provisions based on an assessment of its obligations
and available information. Any matters not included as provisions are
uncertain in nature and cannot be reasonably estimated. The Company makes
assumptions to determine whether obligations exist and to estimate the amount
of obligations that we believe exist. In estimating the final outcome of
litigation, assumptions are made about factors including experience with
similar matters, past history, precedents, relevant financial, scientific, and
other evidence and facts specific to the matter. This determines whether a
provision or disclosure in the financial statements is needed.
Stock-based compensation, warrants and derivative liability
The amounts recorded in respect of share purchase warrants granted and the
derivative liability for warrants issued are based on the Company's estimation
of their fair value, calculated using assumptions regarding the life of the
option or warrant, interest rates and volatility. By their nature, these
estimates and assumptions are subject to uncertainty, and the actual fair
value of options or warrants may differ at any time.
3. Summary of Significant Accounting Policies
The significant accounting policies used in the preparation of these
consolidated financial statements are described below and have been applied
consistently by the Company.
Interests in joint arrangements
Certain of the Company's exploration and production activities are regarded as
joint operations and are conducted under joint operating agreements, whereby
two or more parties jointly control the assets. These consolidated financial
statements reflect only the Company's share of these jointly controlled
operations, and the Company's proportionate share of the relevant revenue and
costs.
Subsidiaries
Subsidiaries are entities controlled by the Group. The financial statements of
subsidiaries are included in the Consolidated Financial Statements from the
date that control commences until the date that control ceases. The accounting
policies of subsidiaries have been changed when necessary to align them with
the policies adopted by the Group. Intra-group balances and transactions are
eliminated in preparing the consolidated financial statements.
Financial instruments
The Company considers whether a contract contains an embedded derivative when
it first becomes a party to it. Embedded derivatives are separated from the
host contract which is not measured at fair value through profit or loss when
the analysis shows that the economic characteristics and risks of embedded
derivatives are not closely related to those of the host contract. Financial
assets and financial liabilities are recognized in the Company's statement of
financial position when the Company becomes party to the contractual
provisions of the instrument. Financial assets are derecognized when the
contractual rights to the cash flows from the financial asset expire or when
the contractual rights to those assets are transferred. Financial
liabilities are derecognized when the obligation specified in the contract is
discharged, cancelled or expired.
Financial assets
Financial assets are classified as financial assets at fair value through
profit or loss or amortized cost, as appropriate. The Company determines
the classification of its financial assets at initial recognition and, where
allowed and appropriate, re-evaluates this designation at each reporting
date. The Company's financial assets are comprised of cash, restricted cash,
trade and other receivables and deposits. Cash and restricted cash are
classified as financial assets at fair value through profit or loss. Trade
and other receivables, and deposits are classified and measured at amortized
cost using the effective interest, less any impairment losses.
Financial liabilities
Financial liabilities are classified as financial liabilities at fair value
through profit or loss or amortized cost. The Company's financial liabilities
are comprised of accounts payable and accrued liabilities, promissory note and
long-term debt. These are classified and measured at amortized cost using the
effective interest method.
Derivative liability
The non-compensation based warrants entitle the holder to acquire a fixed
number of common shares for a fixed British Pence price per share. An
obligation to issue shares for a price that is not fixed in the Company's
functional currency of Canadian Dollars, and that does not qualify as a
share-based payment, must be classified as a derivative liability and measured
at fair value with changes recognized in the statements of operations and
comprehensive income (loss) as they arise. The Company has recorded these
changes as derivative gain (loss) in the statement of operations and
comprehensive income (loss). The transaction costs associated with exercising
of the warrants are expensed when incurred.
Fair value hierarchy
The Company classifies the fair value of financial instruments according to
the following hierarchy based on the amount of observable inputs used to value
the instrument:
· Level 1 - Quoted prices are available in active markets for
identical assets or liabilities as of the reporting date. Active markets are
those in which transactions occur in sufficient frequency and volume to
provide pricing information on an ongoing basis.
· Level 2 - Pricing inputs are other than quoted prices in active
markets included in Level 1. Prices in Level 2 are either directly or
indirectly observable as of the reporting date. Level 2 valuations are based
on inputs, including quoted forward prices for commodities, time value and
volatility factors, which can be substantially observed or corroborated in the
marketplace.
· Level 3 - Valuations in this level are those with inputs for the
asset or liability that are not based on observable market data.
Share capital
Common shares are classified as equity. Incremental costs directly
attributable to the issue of common shares and options are recognized as a
deduction from share capital, net of any tax effects.
Exploration and evaluation assets
Pre-license costs are recognized in the statement of operations and
comprehensive income (loss) as incurred. Exploration and evaluation costs
include the costs of acquiring undeveloped land and drilling costs are
initially capitalized until the drilling of the well is complete and the
results have been evaluated. The costs are accumulated in cost centers by
well, field or exploration area pending determination of technical feasibility
and commercial viability. The technical feasibility and commercial viability
of extracting a mineral resource is considered to be determinable when proved
or probable reserves are determined to exist. If proved and/or probable
reserves are found, the drilling costs and associated undeveloped land are
transferred to property and equipment. When exploration and evaluation assets
are determined not to be technically feasible and commercially viable, or the
Company decides not to continue with its activity, the unrecoverable costs are
charged to the consolidated statements of operations and comprehensive income
(loss) as pre-license expense when occurs.
Property and equipment
Items of property and equipment, which include oil and gas development and
production assets, are measured at cost less accumulated depletion,
depreciation and accumulated impairment losses. The cost of development and
production assets includes: transfers from exploration and evaluation assets,
which generally include the cost to drill the well and the cost of the
associated land upon determination of technical feasibility and commercial
viability; the cost to complete and tie-in the wells; facility costs; the cost
of recognizing provisions for future restoration and decommissioning;
geological and geophysical costs; and directly attributable overheads.
Development and production assets are grouped into CGU's for impairment
testing. Gains and losses on disposal of an item of property and equipment,
including oil and natural gas interests, are determined by comparing the
proceeds from disposal with the carrying amount of property and equipment and
are recognized in the statement of operations and comprehensive income (loss).
Subsequent costs:
Costs incurred subsequent to the determination of technical feasibility and
commercial viability and the costs of replacing parts of property and
equipment are recognized as oil and gas assets only when they increase the
future economic benefits embodied in the specific asset to which they relate.
All other expenditures are expensed as incurred. Such capitalized oil and
natural gas assets generally represent costs incurred in developing proved
and/or probable reserves and bringing in or enhancing production from such
reserves, and are accumulated on a field or geotechnical area basis. The
carrying amount of any replaced or sold component is derecognized. The costs
of the day-to-day servicing of property and equipment are recognized in
operating expenses as incurred.
Depletion and depreciation:
The net carrying value of development and production assets is depleted using
the unit of production method by reference to the ratio of production in the
period to the related proved plus probable reserves, taking into account
estimated future development costs necessary to bring those reserves into
production and the estimated salvage value of the assets at the end of their
useful lives. Future development costs are estimated taking into account the
level of development required to produce the reserves. Proved plus probable
reserves are estimated annually by independent qualified reserve evaluators
and represent the estimated quantities of crude oil, natural gas and natural
gas liquids which geological, geophysical and engineering data demonstrate
with a specified degree of certainty to be recoverable in future years from
known reservoirs and which are considered commercially producible.
Depreciation methods, useful lives and residual values are reviewed at each
reporting date.
Impairment
Financial assets
A financial asset is assessed at each reporting date to determine whether
there is any objective evidence that it is impaired. A financial asset is
considered to be impaired if objective evidence indicates that one or more
events have had a negative effect on the estimated future cash flows of that
asset. An impairment loss in respect of a financial asset measured at
amortized cost is calculated as the difference between its carrying amount and
the present value of the estimated future cash flows discounted at the
original effective interest rate. Individually significant financial assets
are tested for impairment on an individual basis. The remaining financial
assets are assessed collectively in groups that share similar credit risk
characteristics. All impairment losses are recognized in the statement of
operations and comprehensive income (loss). An impairment loss is reversed if
the reversal can be related objectively to an event occurring after the
impairment loss was recognized. For financial assets measured at amortized
cost the reversal is recognized in the statement of operations and
comprehensive income (loss).
Non-financial assets
The carrying amounts of the Company's non-financial assets are reviewed at
each reporting date to determine whether there is any indication of
impairment. If any such indication exists, then the asset's recoverable amount
is estimated. Exploration and evaluation assets are also assessed for
impairment prior to being transferred to property and equipment.
For the purpose of impairment testing, assets are grouped together into the
smallest group of assets that generates cash inflows from continuing use that
are largely independent of the cash inflows of other assets or groups of
assets (CGU). The recoverable amount of an asset or a CGU is the greater of
its value in use and its fair value less costs of disposal. Fair value less
cost to dispose is determined as the amount that would be obtained from the
sale of a CGU in an arm's length transaction between knowledgeable and willing
parties. The fair value less cost to dispose of oil and gas assets is
generally determined as the net present value of the estimated future cash
flows expected to arise from the continued use of the CGU, including any
expansion prospects, and its eventual disposal, using assumptions that an
independent market participant may take into account. These cash flows are
discounted by an appropriate discount rate which would be applied by such a
market participant to arrive at a net present value of the CGU.
Value in use is determined as the net present value of the estimated future
cash flows expected to arise from the continued use of the asset in its
present form and its eventual disposal. Value in use is determined by applying
assumptions specific to the Company's continued use and can only take into
account approved future development costs. Estimates of future cash flows used
in the evaluation of impairment of assets are made using management's
forecasts of commodity prices and expected production volumes. The latter
takes into account assessments of field reservoir performance and includes
expectations about proved and unproved volumes, which are risk-weighted
utilizing geological, production, recovery and economic projections.
An impairment loss is recognized if the carrying amount of a CGU exceeds its
estimated recoverable amount. Impairment losses are recognized in the
statement of operations and comprehensive income (loss). Impairment losses
recognized in respect of CGU's are allocated first to reduce the carrying
amount of any goodwill allocated to the CGU and then to reduce the carrying
amounts of the other assets in the CGU on a pro rata basis. Impairment losses
recognized in prior years are assessed at each reporting date to determine if
facts and circumstances indicate that the loss has decreased or no longer
exists. An impairment loss is reversed if there has been a change in the
estimates used to determine the recoverable amount. An impairment loss is
reversed only to the extent that the asset's carrying amount does not exceed
the carrying amount that would have been determined, net of depletion and
depreciation, if no impairment loss had been recognized.
Share based compensation
The Company has a share based compensation plan for which the compensation
cost attributed to stock options granted is measured at the fair value at the
grant date and expensed over the vesting period with a corresponding increase
to contributed surplus. A forfeiture rate is estimated on the grant date and
is adjusted to reflect the actual number of options or units that vest. Upon
the settlement of the stock options the previously recognized value in
contributed surplus is recorded as an increase to share capital.
Share based compensation granted to non-employees is measured based on the
fair value of the goods or services received, except in cases where this is
not reliably measurable, and then the intrinsic value of the equity
instruments granted is used (i.e. the average value of the Company's shares
over the service period). Share based compensation subject to performance
vesting conditions is recognized based on the Company's estimated probability
of achieving those performance vesting conditions determined at each reporting
date.
The grant date fair value of phantom shares and phantom stock options granted
to officers, employees and directors is recognized as share based payment
expense with a corresponding increase in accrued liabilities on a graded
vesting basis over the vesting period. Subsequent to initial recognition, the
phantom shares and phantom stock options accrued liability is measured at fair
value.
Provisions
A provision is recognized if, as a result of a past event, the Company has a
present legal or constructive obligation that can be estimated reliably, and
it is probable that an outflow of economic benefits will be required to settle
the obligation. Provisions are determined by discounting the expected future
cash flows at a pre-tax risk-free rate that reflects current market
assessments of the time value of money and the risks specific to the
liability. Provisions are not recognized for future operating losses.
Decommissioning obligations
The Company's activities give rise to dismantling, decommissioning and site
disturbance remediation activities. Provision is made for the estimated cost
of abandonment and site restoration and capitalized in the relevant asset
category. Decommissioning obligations are measured at the present value of
management's best estimate of the expenditure required to settle the present
obligation as at the reporting date. Subsequent to the initial measurement,
the obligation is adjusted at the end of each period to reflect the passage of
time and changes in the estimated future cash flows underlying the obligation.
The increase in the provision due to the passage of time is recognized as
accretion (within finance expense) whereas increases/decreases due to changes
in the estimated future cash flows or changes in the discount rate are
capitalized. Actual costs incurred upon settlement of the decommissioning
obligations are charged against the provision to the extent the provision was
established.
Leases
Lease arrangements which meet the criteria of a lease are recognized as
right-of-use assets and lease obligation at the lease commencement date. The
right-of-use asset is initially measured at cost. Subsequently, it is measured
at cost less accumulated depreciation and impairment losses and adjusted for
certain re-measurements of the lease obligation. The lease obligation is
measured at the present value of the lease payments outstanding at the lease
commencement date, discounted using the implicit rate, and when not
determinable, the Company's incremental borrowing rate. The lease obligation
is re-measured when there is a change in estimated future payments arising
from a change in a lease term, index or rate, residual guarantee or purchase
option. The assessment of whether a renewal, extension, termination or
purchase option is reasonably certain to be exercised was considered, based on
facts and circumstances, and has the potential to significantly impact the
amount of right-of-use asset and lease obligation recognized. The Company
recognizes interest expense incurred under finance leases over the lease term
in the consolidated statements of comprehensive income (loss) using the
effective interest rate method.
Revenue
The Company's revenues are primarily derived from the production of petroleum
and natural gas. Revenue from contracts with customers is recognized when
the Company satisfies a performance obligation by physically transferring the
product and control to a customer. The Company satisfies its performance
obligations at the point of delivery of the product and not over a period of
time. Revenue is measured based on the consideration specified in contracts
with customers. Revenue is recorded net of any royalties when the amount of
revenue can be reliably measured and the costs incurred in respect of the
transaction can be measured reliably.
Finance expenses
Finance expense comprises interest expense on borrowings, fees on letters of
credit and accretion of the discount on decommissioning obligations.
Income tax
Income tax expense is comprised of current and deferred tax. Income tax
expense is recognized in the statement of operations and comprehensive income
(loss) except to the extent that it relates to items recognized directly in
equity, in which case it is recognized in equity. Current tax is the expected
tax payable on the taxable income for the year, using tax rates enacted or
substantively enacted at the reporting date, and any adjustment to tax payable
in respect of previous years. Deferred tax is recognized on the temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for taxation purposes.
Deferred tax is not recognized on the initial recognition of assets or
liabilities in a transaction that is not a business combination. In addition,
deferred tax is not recognized for taxable temporary differences arising on
the initial recognition of goodwill.
Deferred tax is measured at the tax rates that are expected to be applied to
temporary differences when they reverse, based on the laws that have been
enacted or substantively enacted by the reporting date. Deferred tax assets
and liabilities are offset if there is a legally enforceable right to offset,
and they relate to income taxes levied by the same tax authority on the same
taxable entity, or on different tax entities, but they intend to settle
current tax liabilities and assets on a net basis or their tax assets and
liabilities will be realized simultaneously. A deferred tax asset is
recognized to the extent that it is probable that future taxable profits will
be available against which the temporary difference can be utilized. Deferred
tax assets are reviewed at each reporting date and are reduced to the extent
that it is no longer probable that the related tax benefit will be realized.
Earnings (loss) per share
Basic earnings (loss) per share is calculated by dividing the net income or
loss attributable to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted earnings (loss) per share
is determined by dividing the net income (loss) attributable to common
shareholders and the weighted average number of common shares outstanding for
the effects of dilutive instruments such as options and warrants granted. The
number of shares included with respect to options is computed using the
treasury stock method.
Recent Accounting Standards
In 2020, the IASB published phase two of its amendments to IFRS 9, IAS 39,
IFRS 7, IFRS 4 - Insurance Contracts and IFRS 16 - Leases ("IFRS 16") to
assist companies in applying IFRS Standards when changes are made to
contractual cash flows or hedging relationships arising from the replacement
of an interest rate benchmark with an alternative benchmark rate from IBOR
reform. These amendments were adopted by the Company from January 1, 2021 but
they did not have a material impact on the Consolidated Financial Statements.
4. Restricted Cash
December 31, December 31, 2020
2021
Colombia (i) $ 53,726 $ 316,216
Canada (ii) 678,827 406,556
Sub-total 732,553 722,772
Long-term portion (732,553) (460,283)
Current portion of restricted cash $ - $ 262,489
(i) Restricted cash is comprised of a deposit held as
collateral to guarantee abandonment expenditures related to the Mateguafa and
Rio Cravo Este-1 wells in the Tapir block.
(ii) Pursuant to Alberta government regulations, the
Company was required to keep a $328,614 (CAD $416,600; 2020: 414,523) 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 $350,213 pertain
to commercial deposits with customers, lease and other deposits held in
Canada.
5. Trade and other receivables
December 31, December 31, 2020
2021
Trade receivables, net of advances $ 252,141 $ 99,061
Other accounts receivable 387,441 2,357,529
$ 639,582 $ 2,456,590
As at December 31, 2021, other accounts receivable include $2,332 (December
31, 2020 - $2,185,890) receivable from a partner in the Tapir block and
corresponds to reimbursable capital expenditures incurred on the Tapir block.
6. Taxes receivable
December 31, December 31, 2020
2021
Value-added tax (VAT) credits recoverable $ 105,827 $ 932,282
Income tax withholdings and advances, net 613,222 727,401
$ 719,049 $ 1,659,683
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.
7. Exploration and Evaluation
December 31, December 31, 2020
2021
Balance, beginning of the period $ 6,961,667 $ 6,961,667
Additions, net 2,839 -
Balance, end of the period $ 6,964,506 $ 6,961,667
8. Property and Equipment
Oil and Gas Properties Right of Use and Other Assets
Cost Total
Balance, December 31, 2019 $ 67,673,851 $ 374,426 $ 68,048,277
Additions 780,588 - 780,588
Oil and gas properties disposed (38,018,095) - (38,018,095)
Change in right-of-use assets (Note 10) - (192,321) (192,321)
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
Accumulated depletion and depreciation and impairment
Balance, December 31, 2019 $ 11,423,360 $ 93,742 $ 11,517,102
Depletion and depreciation 1,995,375 61,893 2,057,268
Change in right-of-use assets (Note 10) - (72,428) (72,428)
Impairment of oil and gas properties 27,263,110 - 27,263,110
Accumulated depletion associated with disposed oil and gas properties
(19,963,103) - (19,963,103)
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
Foreign exchange
Balance December 31, 2019 $ 221,322 $ (8,690) $ 212,632
Effects of movements in foreign
exchange rates 118,042 4,524 122,566
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
Net Book Value
Balance December 31, 2020 $ 10,056,965 $ 94,732 $ 10,151,697
Balance December 31, 2021 $ 15,787,389 $ 65,063 $ 15,852,452
On December 30, 2020, the Company closed its previously announced sale of its
LLA-23 block to COG Energy Ltd. ("COG") for a gross cash consideration of
$12.1 million consisted of a firm amount of $11.75 million plus sale
adjustments agreed within the parties. In addition to receiving the proceeds,
Arrow has transferred to COG its work obligations under various letters of
credit in place to guarantee work commitments on LLA-23, as well as all the
related underlying decommissioning and environmental liabilities (see Note 12
and 13).
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
As at March 31, 2020, the Company reviewed its CGUs and determined that there
were indicators of impairment present in its Colombian assets related to the
decrease in prices and reserves. The company prepared estimates of both the
value in use and fair value less costs of disposal of its CGUs and it was
determined that carrying value of each CGU exceeded its recoverable amount
and, therefore, an impairment loss of $27,263,110 is included in the
consolidated statements of operations and comprehensive income (loss) for the
year ended December 31, 2020. The following table outlines forecast benchmark
prices and exchange rates used in the Company's impairment test as at March
31, 2020:
Exchange rate Brent
Year $US / $Cdn US$/Bbl
2020 (nine months) 0.71 32.00
2021 0.72 42.00
2022 0.73 51.00
2023 0.75 58.00
2024 0.75 62.00
2025 0.75 63.24
Thereafter (inflation %) 0.75 2.0%/yr
The recoverable amounts of the Colombian CGUs at March 31, 2020 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, 2019 adjusted for production and
future pricing changes during the three months ended March 31, 2020, except
for the LLA-23 CGU which used observable market value from bidding offers
received from independent third parties. 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 for the March 31, 2020 impairment test, which took into account
risks specific to the Colombian CGUs and inherent in the oil and gas business,
and provided the following recoverable values:
Recoverable Impairment
CGU Amount Loss
LLA-23 11,500,000 12,098,000
Capella / OMBU - 10,690,000
Tapir 5,390,000 4,475,110
27,263,110
9. 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;
- On or before December 31, 2022, the Company shall make a payment
equal to 50% of the total amount outstanding of interest and principal; and
- The remaining balance of principal and interest shall be paid no
later than June 30, 2023
This amendment also provided that, in the event that the Company made the
payment due on October 31, 2021, Canacol agreed to forgive $658,654 for excess
pipeline shipping costs, as a result of the settlement of the OBC pipeline
dispute (see note 17), which were recognized as other income in the statement
of operations and comprehensive income (loss). On October 27, 2021, the
Company paid $3,111,491 (C$3,900,000) to Canacol as stipulated in this seventh
amendment.
On August 3, 2020, the Company entered into a Fifth Amended and Restated
Promissory Note with Canacol. Among other amendments, Canacol has agreed to
forgive $918,000 of accrued interest to date, in exchange for the Company
providing full and perfected security to the Canacol over the shares of its
operating subsidiaries in Panama. The interest forgiven has been recognized as
interest in the statement of operations and comprehensive loss for the year
ended December 31, 2020.
The Company has granted a general security interest to Canacol for the
obligations under the Promissory Note.
10. Lease Obligations
A reconciliation of the discounted lease obligation is set forth below:
2021 2020
Obligation, beginning of the period $ 70,842 $ 260,197
Changes in existing lease 1,381 (138,984)
Lease payments (24,535) (59,992)
Interest 6,506 15,435
Effects of movements in foreign exchange rates 498 (5,814)
Obligation, end of the year $ 54,692 $ 70,842
Current portion $ 20,258 $ 17,279
Long-term portion 34,434 53,563
$ 54,692 $ 70,842
As at December 31, 2021, the Company has the following future commitments
associated with its office lease obligations:
Less than one year $ 24,816
2 - 5 years 37,223
Total lease payments 62,039
Amounts representing interest over the term (7,347)
Present value of the net obligation $ 54,692
During 2020, the Company renegotiated its remaining lease agreement to reduce
its leased corporate space and its related future lease obligation. As a
result, the Company reduced its right-of-use assets in $119,893 (net) and its
lease obligation in $138,984, and it recognized a gain in change of lease for
$19,091 in the consolidated statement of operations and comprehensive income
(loss).
11. Long-term debt
During 2020, the Company received $31,552 (CAD$40,000) from the Canadian
Emergency Business Account (CEBA) program implemented by the government of
Canada to provide support to small businesses affected by the COVID-19
pandemic. The loan does not bear any interest until December 2022 and is
subject to a 25% forgiveness if the full balance is repaid before that date.
12. 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.
13. Decommissioning Liability
The following table presents the reconciliation of the beginning and ending
aggregate carrying amount of the obligation associated with the
decommissioning of oil and gas properties.
December 31, December 31, 2020
2021
Obligation, beginning of the year $ 2,584,907 $ 8,173,222
Change in estimated cash flows (10,173) (109,864)
Payments or settlements (237,826) -
Liabilities disposed - (6,016,514)
Accretion expenses 132,807 524,477
Effects of movements in foreign exchange rates 524 13,586
Obligation, end of the year $ 2,470,239 $ 2,584,907
The obligation was calculated using a risk-free discount rate range of 1.00%
to 2.00% in Canada (2020: 1.50% to 2.75%) and 8.46% in Colombia (2020: 5.90%)
with an inflation rate of 2.0% and 4.5%, respectively (2020: 2.0% and 2.5%).
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 $4,222,717 (2020: $4,072,683).
14. Derivative liability
Derivative liability includes warrants issued and outstanding as follows:
2021 2020
Warrants Number Amounts Number Amounts
Balance beginning of the year - $ - - $ -
Issued in AIM financing (Note 15) 70,474,768 5,124,985 - -
Issues in private placement (Note 15) 1,999,938 149,543 - -
Fair value adjustment - (582,225) - -
Balance end of the year 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 October and
November 2021, and December 31, 2021 was estimated using the following
assumptions:
October and November 2021 December 31, 2021
Number outstanding re-valued warrants 72,474,768 72,474,706
Fair value of warrants outstanding £0.053 £0.048
Risk free interest rate 0.50% 0.50%
Expected life 2.00 years 1.82 years
Expected volatility 160% 160%
The following table summarizes the warrants outstanding and exercisable at
December 31, 2021:
Number of
warrants Exercise price Expiry date
70,474,768 £0.09 October 25, 2023
1,999,938 £0.09 November 23, 2023
72,474,706
15. Share Capital
(a) Authorized: Unlimited number of common shares without par value
(b) Issued:
2021 2020
Common shares Shares Amounts Shares Amounts
Balance beginning of the year 68,674,602 $50,740,292 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) - -
Balance at end of the year 213,389,643 56,698,237 68,674,602 $50,740,292
(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 14).
(iii) During 2021, the Company recognized share issue costs for $1,162,451
and listing costs of $583,972 associated with the financings completed in 2021
as per above.
(b) Stock options:
The Company has a stock option plan that provides for the issuance to its
directors, officers, employees and consultants options to purchase a number of
non-transferable common shares not exceeding 10% of the common shares that are
outstanding. The exercise price is based on the closing price of the Company's
common shares on the day prior to the day of the grant. A summary of the
status of the Company stock option plan as at December 31, 2021 and 2020 and
changes during the respective periods ended on those dates is presented below:
December 31, 2021 December 31, 2020
Stock Options Number of options Weighted average Number of options Weighted average
exercise Price exercise price
(CAD $) (CAD $)
Beginning of period 6,859,000 $0.40 5,470,000 $0.99
Granted 11,400,000 $0.13 4,319,000 $0.05
Expired/Forfeited (1,145,000) $1.04 (2,930,000) $0.96
End of period 17,114,000 $0.18 6,859,000 $0.40
Exercisable, end of period 2,969,669 $0.46 1,530,001 $1.06
Date of Grant Number Outstanding Exercise Price Weighted Date of Number
(CAD $) Average Remaining Contractual Life Expiry Exercisable
December 31, 2020
October 22, 2018 1,050,000 $1.15 6.81 years Oct. 22, 2028 1,050,000
May 3, 2019 345,000 $0.31 7.34 years May 3, 2029 230,002
March 20, 2020 1,200,000 $0.05 8.22 years March 20, 2030 400,000
April 13, 2020 2,775,000 $0.05 8.29 years April 13, 2030 1,175,000
June 18, 2020 344,000 $0.05 8.47 years June 18, 2030 114,667
December 13, 2021 3,799,998 $0.13 1.45 years June 13, 2023 -
December 13, 2021 3,799,998 $0.13 2.45 years June 13, 2024 -
December 13, 2021 3,800,004 $0.13 3.45 years June 13, 2025 -
Total 17,114,000 $0.18 4.29 years 2,969,669
During 2021, the Company recognized an income of $272,427 (2020 - income of
$81,943) as share based payments expense, with a corresponding decrease in the
contributed surplus account.
(c) Phantom shares:
During 2020, the Company adopted a phantom share program for compensation of
its Directors and executives and granted 13,000,000 phantom common shares of
the Company which are vested immediately at CAD $0.00 per share. During 2021,
the Company recognized $259,527 (2020: $1,163,916) as share based payments
expense and a total $1,761,667 were used as part of management's subscription
of shares issued in the AIM financing (see Common Shares section).
(d) Phantom stock options:
During 2020, the Company adopted a phantom stock option program for
compensation of its executives and granted 1,681,000 phantom stock options of
the Company which are vested in equal parts over the three following years
after granted. During 2021, the Company recognized $34,450 (2020: $87,794) as
share based payments expense and a total $151,290 were used as part of
management's subscription of shares issued in the AIM financing (see Common
Shares section).
16. Income taxes
The provision for income taxes varies from the amount that would be computed
by applying the expected tax rate to income loss before income taxes. The
principal reasons for differences between such expected income tax expense and
the amount actually recorded are as follows:
2021 2020
Income (loss) before income taxes $ 4,374,722 $ (33,992,899)
Corporate income tax rate 23% 24%
Computed expected tax expense (recovery) $ 1,006,186 $ (8,158,296)
Increase (decrease) in income taxes resulting from:
Share based compensation 19,474 280,744
(Recognized)/unrecognized deferred tax benefits (3,871,436) 5,116,588
Tax rate difference on foreign jurisdictions 783,741 (2,487,409)
Other permanent difference (332,528) (363,362)
Foreign exchange and others 1,075,753 3,851,928
Income tax recovery $ (1,318,810) $ (1,759,807)
During 2021, the Company recognized a deferred income tax asset of
$4,839,785 and a deferred tax liability of $3,371,936 which represents the tax
impact of temporary differences and management's estimation of current tax
benefits that would be realized to compensate future taxable income, due to an
increase in forecast commodity prices, at substantially enacted tax rates. In
Colombia, the enacted tax rate is 31% for 2021, and the Colombian government
mandated an increase in the tax rate to 35% from 30% beginning on January 1,
2022. The components of the Company's deferred income tax assets and
liabilities are as follows:
As at December 31 2021 2020
Property and equipment $ (2,421,172) $ (624,325)
Decommissioning liabilities and other provisions 637,785 624,325
Carryforward non-capital losses 3,251,236 -
Net change in deferred tax $ 1,467,850 $ -
Deferred tax liability 3,371,935 -
Deferred tax asset $ 4,839,785 $ -
At December 31, 2021, the Company had non-capital losses carried forward of
approximately $63,875,000 (2020 - $48,492,000) available to reduce future
years taxable income. These losses commence expiring in 2029. At December 31,
2021, the Company had income tax credits and benefits of approximately
$54,586,346 (2020 - $47,527,000) related to Canada and Colombia that were not
recognized in the financial statements due to uncertainties associated with
its ability to utilize these balances in the future.
17. Commitments and Contingencies
Exploration and Production Contracts
The Company has entered into a number of exploration contracts in Colombia
which require the Company to fulfill work program commitments and issue
financial guarantees related thereto. In aggregate, the Company has
outstanding exploration commitments at December 31, 2021 of $17.8 million. The
Company, in conjunction with its partners, have made applications to cancel
$15.5 million ($5.8 million Arrow's share as per table below) in commitments
on the Macaya and Los Picachos blocks. The remaining commitments are expected
to be satisfied by means of seismic work, exploration drilling and farm-outs.
Presented below are the Company's exploration and production contractual
commitments at December 31, 2021:
Block Less than 1 year 1-3 years Thereafter Total
COR-39 - 12,000,000 - 12,000,000
Los Picachos - 1,970,000 - 1,970,000
Macaya - 3,830,000 - 3,830,000
Total - - 17,800,000
17,800,000
Contingencies
From time to time, the Company may be involved in litigation or has claims
sought against it in the normal course of business operations. Management of
the Company is not currently aware of any claims or actions that would
materially affect the Company's reported financial position or results from
operations. Under the terms of certain agreements and the Company's by-laws
the Company indemnifies individuals who have acted at the Company's request to
be a director and/or officer of the Company, to the extent permitted by law,
against any and all damages, liabilities, costs, charges or expenses suffered
by or incurred by the individuals as a result of their service.
Oleoducto Bicentenario de Colombia ("OBC") Pipeline
The Company was party to an agreement with Canacol that entitles it to a 0.5%
interest in OBC, which owns a pipeline system intended to link Llanos basin
oil production to the Caño Limon oil pipeline system in Colombia. Likewise,
Canacol was in litigation with OBC in relation to ship or pay obligations that
were terminated by Canacol in July 2018 under force majeure. On March 27,
2019, the court in charge of the case ruled in favor of the OBC and opined
that the obligations under the ship or pay contract remained in force.
Subsequently, on May 13, 2019, Canacol filed an appeal at the State Council, a
higher-level court in the Colombian judiciary system, requesting annulment of
this ruling. Likewise, in July 2019, OBC has also started litigation against
Canacol for not honouring its ship or pay obligations under the contract.
During 2021, negotiations between the parties involved were finally settled
and approved by the courts and the Company has been cleared from any past and
future ship or pay obligations associated with OBC.
Letters of Credit
At December 31, 2021, the Company had obligations under Letters of Credit
("LC's") outstanding totaling $5.2 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 $643,423 April 14, 2022
ANH Canacol and Carrao Financial Capacity $1,672,162 June 30, 2022
CORE - 39 ANH Canacol Compliance $2,400,000 June 30, 2022
OMBU ANH Carrao Energy Financial Capacity $436,300 April 14, 2022
Total $5,151,885
18. 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.
i) Financial Derivative Contracts
During 2020, the Company had one financial derivative contract in order to
manage commodity price risk. This instrument was not used for trading or
speculative purposes. Arrow had not designated its financial derivative
contract as effective accounting hedge, but the Company considered the
commodity contract to be an effective economic hedge. The financial derivative
contract was recorded on the statements of financial position at fair value,
with the changes in fair value being recognized as an unrealized gain or loss
in the statement of operations and comprehensive income (loss). This contract
was terminated during 2020.
The estimated fair value of the derivative financial instrument in Level 2 at
each measurement date have been determined based on appropriate internal
valuation methodologies and/or third party indications. Level 2 fair values
determined using valuation models require the use of assumptions concerning
the amount and timing of future cash flows and discount rates. In determining
these assumptions, the Company primarily relied on external,
readily-observable quoted market inputs as applicable, including crude oil
forward benchmark commodity prices and volatility, and discounted to present
value as appropriate. The resulting fair value estimates may not necessarily
be indicative of the amounts that could be realized or settled. The realized
gain on risk management activities is included as part of revenues in the
consolidated statements of operations and comprehensive income (loss). The
gains on risk management activities for the period are comprised as follows:
For the years ended
December 31
2021 2020
Realized risk management gain on commodity contract settled $ - $ 1,288,523
Unrealized gain on commodity contract outstanding - -
$ - $ 1,288,523
(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.
During 2020, one of the Company's subsidiary secured a bridge loan with CEDCO
(a subsidiary of COG Energy Ltd., the LLA-23 purchaser) for $500,000 which
assisted the Company in meeting its near-term financial obligations. The loan
had an annual interest rate of 6% and was repayable upon the earliest of: (i)
the closing of the LLA-23 sale, or (ii) the receipt of certain Value-Added Tax
("VAT") refunds in Colombia, or (iii) where the closing of the LLA-23 sale is
delayed after December 31, 2020 or does not occur, or where is terminated,
either in cash or through the delivery of an equivalent value of crude oil
produced from the LLA-23 Block and the Tapir Block. The balance of this bridge
loan and interest was fully paid in November 2020.
The Company prepares annual capital expenditure budgets which are monitored
regularly and updated as considered necessary. Petroleum and natural gas
production is monitored daily to provide current cash flow estimates and the
Company utilizes authorizations for expenditures on projects to manage capital
expenditures. Any funding shortfall may be met in a number of ways, including,
but not limited to, the issuance of new debt or equity instruments, further
expenditure reductions and/or the introduction of joint venture partners.
(e) Capital Management
The Company's objective is to maintain a capital base sufficient to provide
flexibility in the future development of the business and maintain investor,
creditor and market confidence. The Company manages its capital structure
and makes adjustments in response to changes in economic conditions and the
risk characteristics of the underlying assets. The Company considers its
capital structure to include share capital, bank debt (when available),
promissory notes and working capital, defined as current assets less current
liabilities. In order to maintain or adjust the capital structure, from time
to time the Company may issue common shares or other securities, sell assets
or adjust its capital spending to manage current and projected debt levels.
The Company monitors leverage and adjusts its capital structure based on its
net debt level. Net debt is defined as the principal amount of its
outstanding debt, less working capital items. In order to facilitate the
management of its net debt, the Company prepares annual budgets, which are
updated as necessary depending on varying factors including current and
forecast crude oil prices, changes in capital structure, execution of the
Company's business plan and general industry conditions. The annual budget
is approved by the Board of Directors and updates are prepared and reviewed as
required.
The Company's capital includes the following:
December 31, 2021 December 31, 2020
Working capital, before promissory note $ 8,006,074 $ (1,932,940)
Non-Current portion of promissory note (1,659,393) -
$ 6,346,681 $ (1,932,940)
19. Key Management Personnel
The Company has determined that key management personnel consists of its
executive management and its Board of Directors. In addition to the salaries
and fees paid to key management, the Company also provides compensation to
both groups under its share-based compensation plans. Compensation expenses
paid to key management personnel were as follows:
Years ended December 31
2021 2020
Salaries, severances and director fees $ 2,410,920 $ 447,152
Share based payments 227,659 1,169,766
$ 2,638,579 $ 1,616,918
20. 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
years ended and as at December 31:
Year ended December 31, 2021 Colombia Canada Total
Revenue:
Oil Sales $ 6,199,231 $ - $ 6,199,231
Natural gas and liquid sales - 965,449 965,449
Royalties (567,633) (84,554) (652,187)
Expenses (3,282,997) (4,472,550) (7,755,547)
Impairment reversal of oil and gas properties 4,182,575 1,435,201 5,617,776
Taxes 1,318,810 - 1,318,810
Net income (loss) $ 7,849,986 $ (2,156,454) $ 5,693,532
As at December 31, 2021 Colombia Canada Total
Current assets $ 5,198,545 $ 7,607,957 $ 12,806,502
Non-current:
Deferred income taxes 4,839,785 - 4,839,785
Restricted cash 53,726 678,827 732,553
Exploration and evaluation 6,964,506 - 6,964,506
Property, plant and equipment 9,876,172 5,976,280 15,852,452
Total Assets $ 26,932,734 $ 14,263,064 $ 41,195,798
Current liabilities $ 1,550,665 $ 3,249,763 $ 4,800,428
Non-current liabilities:
Long-term debt - 31,552 31,552
Lease obligation - 34,434 34,434
Other liabilities 177,500 - 177,500
Deferred income taxes 3,371,935 - 3,371,935
Decommissioning liability 1,822,243 647,996 2,470,239
Promissory note - 1,659,393 1,659,393
Derivative liability - 4,692,203 4,692,203
Total liabilities $ 6,922,344 $ 10,315,341 $ 17,237,685
Year ended December 31, 2020 Colombia Canada Total
Revenue:
Oil Sales $ 5,179,819 $ - $ 5,179,819
Natural gas and liquid sales - 414,684 414,684
Royalties (236,816) (37,122) (273,938)
Expenses (9,831,878) (3,277,950) (13,109,828)
Impairment of oil and gas properties (27,263,110) - (27,263,110)
Gain on sale of oil and gas properties 1,059,474 - 1,059,474
Taxes 1,759,807 - 1,759,807
Net loss $ (29,332,704) $ (2,900,388) $ (32,233,092)
As at December 31, 2020 Colombia Canada Total
Current assets $ 14,859,186 $ 1,099,466 $ 15,958,652
Non-current:
Restricted cash 53,727 406,556 460,283
Exploration and evaluation 6,961,667 - 6,961,667
Property and equipment 7,016,982 3,134,715 10,151,697
Total Assets $ 28,891,562 $ 4,640,737 $ 33,532,299
Current liabilities $ 8,622,577 $ 9,269,015 $ 17,891,592
Non-current liabilities:
Other liabilities 177,500 - 177,500
Lease obligation - 53,563 53,563
Decommissioning liability 2,081,083 503,824 2,584,907
Long-term debt - 31,416 31,416
Total liabilities $ 10,881,160 $ 9,857,818 $ 20,738,978
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