ANNUAL REPORT 2011 - Connacher Oil and Gas

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AR 2011 PG 38 Taxes The company recorded the differences to the amounts reported for deferred taxes under previous GAAP compared to IFRS for flow-through shares, discount on issue of long-term debt, capitalized share-based compensation, inter-company capital losses and the effects of IFRS transition adjustments. Debt Under previous GAAP, the convertible debentures were treated as a compound financial instrument with a debt and equity component. Under IFRS, the equity component is considered an embedded derivative. As permitted under IFRS, the company designated the convertible debentures as “fair value through profit and loss” and accordingly, recorded convertible debentures at fair value at each reporting period end with changes reported within net earnings (loss). As a result, the equity portion of convertible debentures was reduced by $16.8 million with a corresponding decrease to deficit on January 1, 2010 and December 31, 2010. In addition, the company recognized the effect of change in fair value by increasing the value of the convertible debentures by $3.6 million on January 1, 2010 with a corresponding increase to deficit. The adjustment also resulted in an increase of finance charges in 2010. Reclassifications In order to comply with the presentation of net earnings (loss) adopted by the company under IFRS, in the downstream segment, the company classified $3.9 million from operating expenses to general and administrative expenses in 2010. Further, under previous GAAP, the unwinding of the discount on decommissioning liabilities was included as a part of depletion, depreciation and accretion expense in the consolidated statements of operations and comprehensive loss. Under IFRS this amount totaling $2.9 million in 2010 has been reclassified to finance charges. Changes to the Statement of Cash flow The following is a reconciliation of the company’s cash flow from operating, investing and financing activities reported in accordance with previous GAAP to IFRS for the year ended December 31, 2010: (Canadian dollar in thousands) Year ended December 31, 2010 Cash flow from operating activities under previous GAAP $ 10,785 Exploration and evaluation expenses (964) Interest expense on long-term debt 55,637 Change in working capital relating to interest expense on long-term debt 974 Cash flow from operating activities under IFRS $ 66,432 Cash flow used in investing activities under previous GAAP $ (269,763) Exploration and evaluation expenses 964 Interest capitalized on long-term debt 35,408 Cash flow used in investing activities under IFRS (233,391) Cash flow from financing activities under previous GAAP $ 25,793 Interest expense paid (92,019) Cash flow used in financing activities under IFRS $ (66,226) Under previous GAAP, interest paid on long-term debt was reported as a part of operating activities. During Q4 2011, as permissible under under IFRS, the company elected to present interest payments on long-term debt as financing activities. Loss per share Basic and diluted loss per share under IFRS were impacted by the IFRS adjustments discussed above. CRITICAL ACCOUNTING ESTIMATES We make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. Accordingly, actual reported amounts may differ from estimated amounts as future confirming events occur. Estimation of petroleum and natural gas reserves Petroleum and natural gas reserve estimates are used in the unit–of–production depletion and depreciation calculation, determination of the timing of abandonment costs and impairment analysis of upstream assets. The company’s proved plus probable reserves are estimated with reference to available geological, geophysical and engineering data. Estimates of petroleum and natural gas reserves are inherently imprecise, require the application of judgment and are subject to regular revision, either upward or downward, based on new information.
AR 2011 PG 39 Management is responsible for estimating the quantities of petroleum and natural gas reserves. Estimates are prepared in accordance with National Instrument 51-101, generally accepted industry practices and the standards of the Canadian Oil and Gas Evaluation Handbook. On an annual basis, we have an independent reserves evaluation completed. GLJ Petroleum Consultants performed the annual evaluation effective December 31, 2011. The Board of Directors has established a Reserves Committee to assist them in overseeing the annual review of our petroleum and natural gas reserves. The Reserves Committee comprises two independent Directors and meets with management periodically to review the reserves process and results. The Reserves Committee appoints and meets with the independent reserve evaluation independent of management, to review the scope of their work, whether they have had access to sufficient information, the nature and satisfactory resolution of any material differences of opinion, and their independence. Changes to estimates of petroleum and natural gas reserves affect prospectively the amounts of depletion, depreciation, amortization and impairment charged and, consequently, the carrying amounts of petroleum and natural gas properties and exploration and evaluation assets. The impact of future changes to estimates on the consolidated financial statements of subsequent periods could be material. Impairment of assets For the purposes of impairment analysis of the company’s assets, the key assumptions used in estimating cash flows are future commodity prices, expected production volumes and refinery throughput, cost structures and the outlook of market supply and demand conditions appropriate to the local circumstances and environment. These assumptions and estimates are highly uncertain matters and are subject to change as new information becomes available. Changes in economic conditions can also affect the rate used to discount future cash flow estimates. Changes in assumptions could affect the carrying amounts of assets, and impairment charges and reversals will affect net earnings (loss). Decommissioning liabilities Provisions are recognized for the future abandonment and reclamation of petroleum, natural gas and refining properties at the end of their economic lives. The estimated cost is recognized in net earnings (loss) over the life of the reserves on a unit–of–production basis. Changes in the estimates of costs to be incurred, reserves or in the rate of production will therefore affect net earnings (loss), generally over the remaining economic life of petroleum and natural gas assets. Estimates of the amounts of decommissioning provisions recognized are based on current legal and constructive requirements, technology and price levels. Because actual outflows can differ from estimates due to changes in laws, regulations, public expectations, technology, industry standards, prices and conditions, and can take place many years in the future, the carrying amounts of such provisions are regularly reviewed and adjusted to take account of such changes. The interest rate used to discount the cash flows is reviewed quarterly. Legal and other contingent matters In respect of these matters, the company is required to determine whether a loss is probable based on judgment and interpretation of laws and regulations and determine if such a loss can be estimated. When any such loss is determined, it is charged to earnings. Management continually monitors known and potential contingent matters and makes appropriate provisions by charges to earnings when warranted by circumstance. Taxation Tax provisions are recognized when it is considered probable that there will be a future outflow of funds to a taxing authority. In such cases, provision is made for the amount that is expected to be settled, where this can be reasonably estimated. This requires the application of judgment as to the ultimate outcome, which can change over time depending on facts and circumstances. A change in estimate of the likelihood of a future outflow and/ or in the expected amount to be settled would be recognized in net earnings (loss) in the period in which the change occurs. Deferred tax assets are recognized only to the extent it is considered probable that those assets will be recoverable. This involves an assessment of when those deferred tax assets are likely to be realized, and a judgment as to whether or not there will be sufficient taxable profits available to offset the tax assets when they do reverse. This requires assumptions regarding future profitability and is therefore inherently uncertain. To the extent assumptions regarding future profitability change, there can be an increase or decrease in the amounts recognized in respect of deferred tax assets as well as in the amounts recognized in net earnings (loss) in the period in which the change occurs. Tax provisions are based on enacted or substantively enacted laws. Changes in those laws could affect amounts recognized in net earnings (loss) both in the period of change, which would include any impact on cumulative provisions, and in future periods. Derivative financial instruments We may use derivative financial instruments to manage exposure to market risks relating to commodity prices, foreign currency exchange rates and interest rates. Derivative financial instruments are not used for speculative purposes. We enter into financial transactions to help reduce exposure to price fluctuations with respect to commodity purchase and sale transactions to achieve targeted investment returns and growth objectives, while maintaining prescribed financial metrics. These transactions generally are swaps, collars or options and are generally entered into with major financial institutions or commodities trading institutions as counterparties. We may also use derivative financial instruments, such as interest rate swap
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 and 38: AR 2011 PG 35 ACCOUNTING POLICIES A
Page 39: AR 2011 PG 37 The company classifie
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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