ANNUAL REPORT 2011 - Connacher Oil and Gas

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AR 2011 PG 36 Estimates Hindsight was not used to create or revise estimates and accordingly, the estimates made by the company under previous GAAP are consistent with their application under IFRS. Additional exemptions applied The company applied additional exemptions for cumulative foreign currency translation differences, share-based compensation, decommissioning liabilities and accounting for investment in associate, which are explained in the respective paragraphs below. Exploration and Evaluation As explained above under “Deemed cost election for oil and gas properties”, the company reclassified $96.2 million and $120.8 million to exploration and evaluation assets at January 1, 2010 and December 31, 2010, respectively, based on the deemed carrying amounts representing unproved properties balance as determined under previous GAAP. Additionally, under IFRS, costs incurred prior to obtaining the legal rights to explore are expensed whereas under previous GAAP these costs were capitalized as part of property, plant and equipment. Accordingly, the company recognized exploration and evaluation expense in net earnings (loss) of $964,000 in the year ended December 31, 2010 and recorded the corresponding decrease to the property, plant and equipment. This adjustment also resulted in an equivalent decrease in cash flow from operating activities under IFRS compared to the reported amounts under previous GAAP. The effect of the above adjustment on deficit was a reduction of $722,000 after tax benefits of $242,000 for the year ended December 31, 2010. Depletion, Depreciation and Amortization Under previous GAAP, petroleum and natural gas properties were depleted using the unit-of-production method calculated for each one Canada cost centre. Under IFRS, petroleum and natural gas properties are depleted using the unit-of-production method based on estimated proved and probable reserves determined using estimated future prices and costs calculated at the established area level. Further, as permitted under IFRS, the company elected to amortize certain exploration and evaluation assets (undeveloped land) over the lease term. Under previous GAAP, undeveloped land was tested for impairment and any resulting impairment was included in the full cost pool for depletion purposes. As a result, depletion, depreciation and amortization expense decreased by $1.3 million in the year ended December 31, 2010, with a corresponding increase to exploration and evaluation assets and property, plant and equipment. The effect of the above adjustment on deficit was a decrease of $1.0 million after tax benefits of $0.3 million for the year ended December 31, 2010. Impairment Under previous GAAP, capitalized costs of petroleum and natural gas properties and goodwill were tested for impairment separately whereas under IFRS, capitalized costs of petroleum and natural gas properties and goodwill are allocated to cash-generating units (“CGU’s”) for impairment testing purposes. Under previous GAAP, impairment of petroleum and natural gas properties was recognized if their carrying amount exceeded the undiscounted cash flows from proved reserves for a country cost centre. Impairment was measured as the amount by which the carrying amount exceeded the sum of the fair value of the proved and probable reserves and the costs of unproved properties. The company did not report any impairment under previous GAAP on December 31, 2009 and 2010. Under previous GAAP, goodwill was tested with reference to the reporting unit. The company had allocated goodwill to the upstream reporting unit and goodwill was not considered impaired. Under IFRS, impairment is recognized if the carrying amount for a CGU exceeds the recoverable amount. A CGU is defined as the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. On the transition date, the company performed an impairment test by allocating all capitalized costs of petroleum and natural gas properties, goodwill and directly related liabilities to applicable cash-generating units based on their ability to generate largely independent cash flows (a lower level than previous GAAP) and determined that an impairment charge of $113.9 million on January 1, 2010 was required. Of the total impairment charge, $103.7 million was allocated to goodwill and $10.2 million was allocated to petroleum and natural gas properties, with the corresponding increase to deficit of $111.3 million, net of a tax benefit of $2.6 million. Asset and Liabilities Held For Sale and Disposition of Oil and Gas Properties Under previous GAAP, the proceeds from disposition of petroleum and natural gas properties were deducted from the full cost pool without recognition of a gain or loss and the accounting standard for classification of assets and liabilities as held for sale was not applicable to the disposition of petroleum and natural gas properties, unless the impact of the disposition was expected to result in a change to the depletion, depreciation and amortization rate of 20 percent or greater, in which case a gain or loss was recorded and assets and liabilities were classified as held for sale. Under IFRS, gains or losses are recorded on dispositions and are calculated as the difference between the proceeds and the net book value of the asset disposed of, and the requirements of the classification of assets and liabilities as held for sale are applicable to all petroleum and natural gas properties.
AR 2011 PG 37 The company classified its assets and liabilities relating to certain petroleum and natural gas properties as held for sale on December 31, 2010 and recorded them at lower of their carrying amount or fair value less costs to sell. The adjustment resulted in a reclassification of carrying amount of property, plant and equipment totaling $54.3 million, exploration and evaluation assets totaling $5.7 million and decommissioning liability totaling $10.9 million to assets and liabilities classified as held for sale. At December 31, 2010, an impairment charge of $4.5 million was recognized based on the difference between the December 31, 2010 carrying amounts of the assets prior to reclassification and the estimated recoverable amount. The recoverable amount was determined using fair value less costs to sell which was based on the sale price subsequently agreed to binding sale agreements with third parties. During the year ended December 31, 2010, the company recognized a loss of $0.8 million on the sale of minor petroleum and natural gas properties and exploration and evaluation assets. The effect of the above adjustments on deficit was a reduction of $3.9 million after tax benefits of $1.3 million for the year ended December 31, 2010. Foreign Currency In accordance with IFRS 1, the company has elected to deem all foreign currency translation differences that arose prior to the transition date in respect of foreign operations and the company’s share of associate’s translation differences to be nil and reclassified amounts recorded in other comprehensive loss as determined in accordance with previous GAAP to deficit. As a result, accumulated other comprehensive loss was decreased by $16.2 million with a corresponding increase to deficit as at January 1, 2010. Compensation – Defined Benefit Plan The company elected to use the IFRS 1 exemption whereby the cumulative unamortized net actuarial gains and losses of the company’s defined benefit plan were charged to deficit on January 1, 2010. This resulted in a decrease of $722,000 to the accrued benefit obligation and a corresponding decrease to deficit. Decommissioning liabilities Under previous GAAP, the asset retirement obligation was measured at the estimated fair value determined using estimated future cash outflows discounted using a credit-adjusted risk free interest rate and the liability was not remeasured to reflect period end discount rates. Under IFRS, the asset retirement obligation has been named “decommissioning liabilities”, fair value is measured as the best estimate of the future expenditure to be incurred discounted at a risk free interest rate, decommissioning liabilities are remeasured using the period end discount rate. In conjunction with the IFRS 1 exemption regarding petroleum and natural gas properties discussed above, the company was required to remeasure its decommissioning liabilities upon transition to IFRS and recognize the difference in deficit. The application of this exemption resulted in a $20.9 million increase to decommissioning liabilities on the company’s consolidated balance sheet as at January 1, 2010 and a charge to deficit of $15.6 million net of tax benefit of $5.2 million. Subsequent IFRS remeasurements of decommissioning liabilities are recorded through property, plant and equipment with an offsetting adjustment to decommissioning liabilities. As at December 31, 2010, excluding the January 1, 2010 adjustment, the company’s decommissioning liabilities increased by $10.9 million which primarily reflects the remeasurement of the obligation using the company’s discount rate of 3.2 percent as at December 31, 2010. The use of the lower discount rate resulted in a decrease in the provision for unwinding of the discount totaling $812,000 for the year ended December 31, 2010. Investment in Associate As at January 1, 2010 and December 31, 2010, the company owned 26.9 million Petrolifera common shares, representing 22 percent and 18.5 percent, respectively, of Petrolifera’s issued and outstanding common shares and 6.8 million Petrolifera share purchase warrants. Petrolifera was accounted for as an equity investment in associate. The following are the key differences in IFRS compared to previous GAAP. • As a part of the company’s transition to IFRS, the company recorded adjustments to its share of loss, other comprehensive loss and dilution loss with a corresponding effect on the investment account balance and deficit reflecting the adjustments to conform Petrolifera’s financial position and results of operations in accordance with IFRS and the accounting policies adopted by the company on its transition date. • Under previous GAAP, the company did not record the investment in share purchase warrants separately and allocated the total cost of $11.9 million for additional shares purchased in 2009 to an investment in equity-accounted for investment on the consolidated balance sheet whereas under IFRS, share purchase warrants meet the definition of a derivative asset that should be bifurcated from the host contract (investment in associate) and recorded at fair value on each reporting period end with changes recorded in net earnings (loss). As a result, the company recorded the fair value of share purchase warrants on January 1, 2010 by increasing other assets and decreasing deficit. In addition, the company recorded an unrealized loss of $2.2 million in 2010 representing the change in fair value of this derivative financial asset. • Under IFRS, assets relating to the investment in Petrolifera were classified as assets held for sale on December 31, 2010. Equity accounting ceased on December 31, 2010 and the carrying amount of the investment in associate was classified as assets held for sale and recorded at the lower of its carrying amount and fair value less costs to sell. Under previous GAAP, the accounting standard for classification of assets and liabilities as held for sale was not applicable to the disposition of investment in associate and accordingly, no classification of assets held for sale was reported. However, under previous GAAP, the company recognized impairment to record the investment at its fair value.
Page 1 and 2: ANNUAL REPORT 2011 WELL POSITIONED
Page 3 and 4: AR 2011 PG 1 02 HIGHLIGHTS 05 LETTE
Page 5 and 6: AR 2011 PG 3 Years ended December 3
Page 7 and 8: AR 2011 PG 5 Volatility in the oil
Page 9 and 10: AR 2011 PG 7 “Thanks to our liqui
Page 11 and 12: AR 2011 PG 9 Review of Operations I
Page 13 and 14: AR 2011 PG 11 proposals helped to p
Page 15 and 16: AR 2011 PG 13 reservoir description
Page 17 and 18: AR 2011 PG 15 Connacher Oil and Gas
Page 19 and 20: AR 2011 PG 17 the movement of wildl
Page 21 and 22: AR 2011 PG 19 MANAGEMENT’S DISCUS
Page 23 and 24: AR 2011 PG 21 reduced interest rate
Page 25 and 26: AR 2011 PG 23 Connacher’s bitumen
Page 27 and 28: AR 2011 PG 25 OPERATING COSTS (1) T
Page 29 and 30: AR 2011 PG 27 SALES PRODUCT MIX (%)
Page 31 and 32: AR 2011 PG 29 Depletion expense is
Page 33 and 34: AR 2011 PG 31 NEW NOTES We issued U
Page 35 and 36: AR 2011 PG 33 Compensation of key m
Page 37: AR 2011 PG 35 ACCOUNTING POLICIES A
Page 41 and 42: AR 2011 PG 39 Management is respons
Page 43 and 44: AR 2011 PG 41 The production outloo
Page 45 and 46: AR 2011 PG 43 QUARTERLY HIGHLIGHTS
Page 47 and 48: AR 2011 PG 45 Independent Auditor
Page 49 and 50: AR 2011 PG 47 Consolidated Statemen
Page 51 and 52: AR 2011 PG 49 Consolidated Statemen
Page 53 and 54: AR 2011 PG 51 Impairment of assets
Page 55 and 56: AR 2011 PG 53 Goodwill is allocated
Page 57 and 58: AR 2011 PG 55 3.11 Leases Agreement
Page 59 and 60: AR 2011 PG 57 IAS 1 Presentation of
Page 61 and 62: AR 2011 PG 59 Reconciliation of seg
Page 63 and 64: AR 2011 PG 61 8.1 Petroleum and nat
Page 65 and 66: AR 2011 PG 63 10. PROPERTY, Plant a
Page 67 and 68: AR 2011 PG 65 Accounts receivable a
Page 69 and 70: AR 2011 PG 67 December 31, 2010 - C
Page 71 and 72: AR 2011 PG 69 13.3 Refinancing of l
Page 73 and 74: AR 2011 PG 71 Changes in present va
Page 75 and 76: AR 2011 PG 73 The provision for inc
Page 77 and 78: AR 2011 PG 75 The following table s
Page 79 and 80: AR 2011 PG 77 19. FINANCE Charges F
Page 81 and 82: AR 2011 PG 79 Compensation of key m
Page 83 and 84: AR 2011 PG 81 Estimates Hindsight w
Page 85 and 86: AR 2011 PG 83 Reconciliation of Con
Page 87 and 88: AR 2011 PG 85 27.3 Asset and Liabil
Page 89 and 90:
AR 2011 PG 87 The following table s
Page 91 and 92:
CORPORATE INFORMATION Board of Dire
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ANNUAL REPORT 2011 - Connacher Oil and Gas

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