ANNUAL REPORT 2011 - Connacher Oil and Gas

AR 2011
PG 19
MANAGEMENT’S DISCUSSION AND ANALYSIS
This Management’s Discussion and Analysis (“MD&A”) for Connacher Oil and Gas Limited (“Connacher” or the “company” ” or “we” or “our”) is dated
March 15, 2012 and should be read in conjunction with Connacher’s consolidated financial statements for the years ended December 31, 2011
(“YTD 2011”) and December 31, 2010 (“YTD 2010”).
The consolidated financial statements and comparative information have been prepared in accordance with International Financial Reporting
Standard (“IFRS”) 1, “First-time Adoption of International Financial Reporting Standards” as issued by the International Accounting Standards
Board. In this MD&A, the term “previous GAAP” refers to Canadian generally accepted accounting principles prior to the adoption of IFRS.
Unless otherwise noted, 2010 comparative information has been prepared in accordance with IFRS, which now comprises Canadian GAAP.
The adoption of IFRS has not had any material impact on the company’s operations or strategic directions. The most significant area of impact
was the adoption of the IFRS upstream oil and gas accounting principles. Further information on the IFRS impacts is provided in the Accounting
Policies and Estimates Section of this MD&A.
Please read the Advisory section of the MD&A which provides information on Forward-Looking Statements, Non-GAAP measurements
and other information. Additional information relating to Connacher, including Connacher’s Annual Information Form (“AIF”), can be found
on SEDAR at www.sedar.com or on the company’s website at www.connacheroil.com.
2011 OVERVIEW
Connacher is a Calgary-based integrated energy company. We explore for, develop and produce bitumen, crude oil, natural gas and natural gas liquids
in Canada, our upstream business segment. We also own and operate a heavy oil refinery in Great Falls, Montana through our wholly owned subsidiary
Montana Refining Company, Inc. (‘‘MRCI’’), our downstream business segment. The refinery processes and refines crude oil into refined products
including gasoline, jet fuel, diesel fuel/distillates, asphalt and other ancillary products. Connacher’s shares trade on the TSX under the symbol CLL.
Our primary asset is our 100% ownership of bitumen reserves and production from two steam assisted gravity drainage (“SAGD”) plants, Pod
One and Algar, at our Great Divide oil sands lease block in northeastern Alberta. While SAGD bitumen production represents our greatest growth
opportunity, we benefit strategically from also owning conventional production and refining assets for reasons of risk mitigation, capital requirements
and regulatory process, among other factors.
Our heavy crude oil refinery provides a strategic advantage because it offers a partial hedge against heavy crude oil differential price risk, provides
diluent needed for our oil sands operations and affords a beneficial window on marketing opportunities in the United States of America (“USA”) for
our bitumen and dilbit (bitumen mixed with diluent).
The table below shows the distribution of our gross revenue from oil sands production, conventional production and refining for the most recent and
comparative reporting periods.
Gross revenue
and % of total gross revenue
Three months ended December 31 Year ended December 31
2011 2010 2011 2010
($000) % ($000) % ($000) % ($000) %
Oil sands (1)(2) $ 123,150 53 $ 99,456 54 $ 443,768 49 $ 247,187 40
Conventional (1) 4,330 2 8,010 4 18,494 2 34,171 6
Refining (1) 107,010 45 77,435 42 441,143 49 334,165 54
Total gross revenues (1)(2) $ 234,490 100 $ 184,901 100 $ 903,405 100 $ 615,523 100
(1) Before eliminating intercompany transactions and before royalties.
(2) Revenue from Algar included effective October 1, 2010.
The increase in oil sands gross revenue of 24 percent in Q4 2011 was primarily driven by higher realized bitumen prices. Oil sands revenue increased
significantly in YTD 2011 compared to YTD 2010 due to the start-up of production at Algar, our second oil sands SAGD project. Conventional gross
revenue decreased in the 2011 periods compared to the 2010 periods primarily due to lower production as a result of the sale of certain mature
producing properties. Refining revenues increased in 2011 periods due to higher refined products sales volumes and realized prices.
Connacher’s overall objective is to create shareholder value. In 2011, we accomplished our goals of monetizing non-core, mature and non-cash
generating assets; reducing balance sheet risk by extending the maturity profile of, and reducing interest coupon on our long term debt and reducing
our exposure to foreign exchange risk through a reduction of US denominated debt; and increasing year over year production at Great Divide.