ANNUAL REPORT 2011 - Connacher Oil and Gas

AR 2011
PG 67
December 31, 2010 – Crude oil contracts
Volume (bbl/d) Term Type Price
(WTI U.S.$/bbl)
Liability (Asset) as at
December 31, 2010
(Canadian dollar
in thousands)
1,000 Jan 1, 2011 – Mar 31, 2011 Swap $ 86.10 $ 561
1,000 Jan 1, 2011 – Mar 31, 2011 Swap $ 88.10 382
2,000 Apr 1, 2011 – Jun 30, 2011 Swap $ 85.25 1,552
2,000 Jan 1, 2011 – Dec 31, 2011 Swap (1) $ 90.60 10,392
2,000 Jan 1, 2011 – Mar 31, 2011 Call option $ 100.25 162
2,000 Jan 1, 2011 – Mar 31, 2011 Put option $ 80.00 (82)
2,000 Apr 1, 2011 – Mar 31, 2012 Call option $ 96.00 5,918
2,000 Apr 1, 2011 – Mar 31, 2012 Put option $ 80.00 (2,796)
2,000 Jul 1, 2011 – Jun 30, 2012 Call option $ 100.00 5,591
2,000 Jul 1, 2011 – Jun 30, 2012 Put option $ 80.00 (3,560)
Balance, as at December 31, 2010 $ 18,120
(1) On December 30, 2011, the counterparty had a right to extend the maturity date of the contract for additional one year from January 1, 2012 to December 31, 2012 at US$ 90.60/bbl. The counter party
exercised its right to extend the contract on December 30, 2011.
December 31, 2010 – Natural gas contracts
Volume (GJ/d) Term Type Price
(AECO CAD$/GJ)
Liability as at
December 31, 2010
(Canadian dollar
in thousands)
4,000 Sept 1, 2010 – Aug 31, 2011 Swap $ 3.87 $ 187
4,000 Oct 1, 2010 – Sept 30, 2011 Swap $ 4.20 556
Balance, as at December 31, 2010 $ 743
The following table summarizes the amounts recorded in net earnings (loss) with respect to the risk management contracts:
For the year ended December 31 2011 2010
(Canadian dollar in thousands) Upstream Downstream Total Upstream Downstream Total
Unrealized (gain) loss $ (5,659) $ (5,593) $ (11,252) $ 14,343 $ – $ 14,343
Realized (gain) loss 10,161 (1,036) 9,125 2,300 543 2,843
(Gain) loss on risk management contracts $ 4,502 $ (6,629) $ (2,127) $ 16,643 $ 543 $ 17,186
As at December 31, 2011, had the forward price for WTI been U.S. $1/bbl higher or lower, the impact relating to the crude oil and refined products
risk management contracts would have been to increase or decrease, respectively, net loss before income taxes by $1.9 million.
As at December 31, 2011, had the forward price for AECO been CAD $0.10/GJ higher or lower, the impact relating to the natural gas risk
management contracts would have been to decrease or increase, respectively, net loss before income taxes by $275,000.
Interest rate risk
Interest rate risk refers to the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The
company’s Second Lien Senior Notes and Convertible Debentures have fixed interest rate obligations and, therefore, are not subject to changes
in interest rates. The Revolving Credit Facility bears floating interest rate. At December 31, 2011, the company had no debt outstanding under the
Facility. Therefore, the potential increase or decrease in net earnings or loss for each one percent change in interest rate was nil.
Currency risk
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.
The company is exposed to fluctuations in foreign currency on its financial instruments primarily as a result of its U.S. dollar denominated long–term
debt, crude oil sales based on U.S. dollar indices and commodity price contracts that are settled in U.S. dollars. The effect on the company’s financial
instruments of a $0.01 change in the U.S. to Canadian dollar exchange rate would have resulted in a $4.7 million change in foreign exchange gain/
loss at December 31, 2011. The company’s downstream operations operate with a U.S. dollar functional currency, which gives rise to currency
exchange rate risk on translation of MRCI’s operations. The impact is recorded in other comprehensive income/loss. The effect on the company’s
financial instruments of a $0.01 change in the U.S. to Canadian dollar exchange rate would have resulted in $54,000 change in other comprehensive
income (loss) at December 31, 2011. The company manages these exchange rate risks by occasionally entering into fixed rate currency exchange
contracts on future U.S. dollar payments and U.S. dollar sales receipts. In 2011, the company entered in a fixed rate forward contract to buy US$ 5
million at 1.019 on July 22, 2012 to minimize its exposure to the foreign exchange fluctuations on its interest payments due in 2012. The unrealized
gain of $5,000 relating to this contract was recorded as a part of finance charges and other assets in 2011. Subsequent to December 31, 2011, the
company entered a fixed rate forward contract to buy US$ 5 million at 1.0175 on July 20, 2012.