ANNUAL REPORT 2011 - Connacher Oil and Gas

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AR 2011 PG 50 Notes to the Consolidated Financial Statements For the years ended December 31, 2011 and 2010 1. Nature of Operations Connacher Oil and Gas Limited (“Connacher”) is a public company listed on the Toronto Stock Exchange under the symbol CLL and headquartered in Calgary, Alberta, Canada. The consolidated financial statements, as at December 31, 2011 and for the year then ended, comprise those of Connacher and its subsidiaries (collectively referred to as the “company”). The address of the company’s principal office is Suite 900, 322 – 6th Avenue S.W., Calgary, Alberta. The company is engaged in the business of development, production and refining of bitumen, crude oil and natural gas. These consolidated financial statements were approved and authorized for issuance by the Board of Directors on March 15, 2012. 2. Basis of PREPARATION 2.1 Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). These are the company’s first consolidated financial statements prepared under IFRS. As a result, IFRS 1, “First–time Adoption of International Financial Reporting Standards” has been applied. In these financial statements, the term “previous GAAP” refers to Canadian generally accepted accounting principles prior to the adoption of IFRS. An explanation of the impacts on financial performance, financial position and cash flows on the transition to IFRS is provided in note 27. 2.2 Basis of measurement These consolidated financial statements have been prepared on a historical cost basis except for the following which have been measured at fair value: • Risk management contracts; • Investment in equity securities and share purchase warrants; • Liabilities for cash–settled share–based payment arrangements; • Assets classified as held for sale where the carrying amount is higher than the fair value; and • Convertible Debentures. 2.3 Functional and presentation currency The consolidated financial statements are presented in Canadian dollars which is the functional currency of Connacher. The functional currency of the company’s subsidiary companies is primarily the US dollar. 2.4 Use of estimates and judgments The timely preparation of consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of 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 annually by independent reserves engineers 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. The impact of future changes to estimates on the consolidated financial statements of subsequent periods could be material. 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. Information about the carrying amounts of petroleum and natural gas properties and exploration and evaluation assets and the amounts charged to net earnings (loss), including depletion, depreciation, amortization and impairment, is presented in note 9 and 10.
AR 2011 PG 51 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). Information about the carrying amounts of assets and impairments is presented in notes 9 and 10. 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. Information about decommissioning liabilities is presented in note 14. 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. Financial instruments The company records its financial instruments at fair value on inception and at each reporting period depending on their subsequent classification. The calculation of the fair value requires judgment around expected outcome and is based on multiple variables such as the company’s credit risk and interest rate spread. The estimated fair value of the financial instruments, by their very nature, is subject to measurement uncertainty. Other significant areas of judgment The estimates of net realizable value of inventory involve estimating future selling prices and accordingly, are subject to measurement uncertainty. The amounts for pension assets, obligations and pension costs charged to net earnings (loss) depend on certain actuarial and economic assumptions, which are subject to measurement uncertainty. Amounts recorded for share–based compensation expense are based, in part, on the historical volatility of the company’s share price, which may not be indicative of future volatility. Accordingly, those amounts are subject to measurement uncertainty. 3. SIGNIFICANT ACCOUNTING POLICIES 3.1 Basis of consolidation The consolidated financial statements include the financial statements of Connacher and its subsidiaries, being those which are controlled by the company. Control exists when the company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases, using consistent accounting policies. All inter–company balances and transactions, including gains and losses arising from such transactions, are eliminated.
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 and 40: AR 2011 PG 37 The company classifie
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: AR 2011 PG 49 Consolidated Statemen
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

ANNUAL REPORT 2011 - Connacher Oil and Gas

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