ANNUAL REPORT 2011 - Connacher Oil and Gas

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AR 2011 PG 6 As at December 31, 2011, Connacher’s estimated proved and probable (“2P”) bitumen and conventional crude oil, natural gas and natural gas liquids reserves, as evaluated by GLJ Petroleum Consultants Ltd. (“GLJ”), independent qualified reserves evaluators, totaled approximately 504 million barrels of oil equivalent (“boe”). Despite a very modest capital program during 2011, bitumen reserve volumes held virtually constant in all reserve categories, with the exception of proved producing bitumen, of which approximately 4.9 million barrels were produced during the year. The 10 percent pre-tax present value of 2P reserves decreased to $2.5 billion, due primarily to increased estimated future capital costs, adjusted near-term production forecasts and capital plans. Contingent and prospective bitumen resources also declined, mainly as a result of the sale of the Company’s Halfway Creek property. In 2011, the Company embarked on a program to rationalize its non-core asset base. In February 2011, the mature Battrum, Saskatchewan crude oil producing property was sold for $56.2 million and in April 2011 the Marten Creek/Randall natural gas property in north central Alberta was sold for $22.1 million. Additionally, Connacher sold its undivided 50 percent working interest in lands at Halfway Creek, Alberta, situated south of Fort McMurray, for $26.5 million, as well as undeveloped land for $12.5 million, primarily situated at Latornell in the Deep Basin of northwestern Alberta. Total proceeds from these divestitures was $117.3 million which was added to working capital. Connacher’s 9,500 bbl/d heavy oil refinery in Great Falls, Montana had a very successful 2011, operating at 104 percent of capacity, up from 102 percent of capacity in 2010. Strong refinery margins were primarily due to the improved stability of refining operations, more favorable weather conditions for road paving activities that buoyed higher relative asphalt sales and increased demand for refined petroleum products such as gasoline, diesel and jet fuel in 2011. The refinery is strategically aligned with the Company’s oil sands business. It primarily processes Canadian heavy sour crude oil into a range of higher value refined petroleum products, thereby capturing more of the value chain in a produced barrel of oil. Accordingly, the refinery provides a physical hedge for Connacher’s bitumen revenue by recovering a portion of the heavy oil differential in its netbacks under normal operating conditions. Over the past several years closely aligned marketing initiatives between upstream and downstream operations served the Company well in dealing with the challenging North American energy market environment. Notwithstanding higher adjusted EBITDA, the Company incurred a net loss of $114.1 million or $0.25 per share in 2011 compared to a net loss of $44.7 million or $0.10 per share in 2010. This was primarily due to lower unrealized foreign exchange gains, mainly in respect of U.S. dollar denominated debt, and higher depletion and finance charges, partially offset by gains on the sale of assets and on risk management contracts. Please refer to the Management’s Discussion and Analysis for the year ended December 31, 2011 (“MD&A”) for a more detailed discussion in this regard. At December 31, 2011, cash balances were $117.0 million, working capital was $16.9 million and long-term debt totaled $856.0 million. Convertible debentures with face value of approximately $100 million are due for repayment in June of 2012, accounting for the difference between cash and working capital as the debentures are classified as current debt on the balance sheet. Connacher has available bank credit lines of $100 million net of outstanding letters of credit totaling $2.2 million which had been issued by the Company at year end 2011.
AR 2011 PG 7 “Thanks to our liquidity, balanced operations, production potential and demonstrated execution, we’re optimistic about the future.” Total capital expenditures during the year were $163.4 million which was financed from operating cash flow and cash balances. Details of the overall capital program are contained in the MD&A. Externally there is great uncertainty in the capital and debt markets which creates volatility in oil prices and oil price differentials. Connacher remains bullish about the long term price of bitumen, but the Company also recognizes that during the second quarter there will be continued pressure on differentials and therefore wellhead pricing. The price of natural gas is a key component in Connacher’s oil sands operations (natural gas is the biggest cost component in the generation of steam) and is expected to remain low for the remainder of the year. Locally, the Alberta corridor continues to be a “bubble” with regard to costs of services, fabrication of equipment and access to human resources. Importantly, the hiatus in Connacher’s capital spending provided time to determine more cost effective if not local solutions. The everincreasing focus on oil sands by the media, stakeholders and governments has resulted in expanded - not streamlined - approval processes. Effective leadership on both sides of the border will be necessary to drive efficient and economic outcomes. Connacher is focused on delivering successive and sustained improvement in operating and financial results and liquidity. Based on currently available information and prevailing commodity prices, the Company anticipates 2012 results that reflect solid operational performance in spite of current capital constraints. The Company’s 2012 capital budget has been set at $50.0 million as outlined in the Company’s MD&A, including the previously announced maintenance capital budget of $37.0 million. The Company is proceeding with preparatory work on several sustaining and growth projects, including the recently completed five-well core hole program designed to provide further technical data for the Great Divide expansion project and Pad 104 drilling program at Pod One. Additional work is ongoing to finalize the design basis memorandum for the Great Divide expansion project, complete the preparation of a commercial front end engineering design study for the Company’s SAGD+ project and the expansion and upgrading of rail and other facilities at the Montana refinery. As previously announced, the Company’s Board of Directors has initiated a process to review Connacher’s business plan and to identify, examine and consider all strategies available to the Company, both near and long term, in order to prudently determine the optimal course of action for the Company. Goldman Sachs and RBC Capital Markets have been engaged to assist the Board of Directors in connection with this strategic review. In addition, the current directors of the Company are pleased to welcome Mr. Greg Boland and Mr. Garry Mihaichuk to the Board. The Company has a number of capital projects with very good economics that are expected to increase production and/or improve netbacks. These projects will continue to be evaluated during this period and will be undertaken as free cash flow is available. Thanks to Connacher’s liquidity, balanced operations, significant production potential and demonstrated execution, we’re optimistic about the future. Colin M. Evans and Kelly J. Ogle Co-Managing Directors March 15, 2012
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: AR 2011 PG 5 Volatility in the oil
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 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
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AR 2011 PG 57 IAS 1 Presentation of
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AR 2011 PG 59 Reconciliation of seg
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AR 2011 PG 61 8.1 Petroleum and nat
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AR 2011 PG 63 10. PROPERTY, Plant a
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AR 2011 PG 65 Accounts receivable a
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AR 2011 PG 67 December 31, 2010 - C
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AR 2011 PG 69 13.3 Refinancing of l
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AR 2011 PG 71 Changes in present va
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AR 2011 PG 73 The provision for inc
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AR 2011 PG 75 The following table s
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AR 2011 PG 77 19. FINANCE Charges F
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AR 2011 PG 79 Compensation of key m
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AR 2011 PG 81 Estimates Hindsight w
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AR 2011 PG 83 Reconciliation of Con
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AR 2011 PG 85 27.3 Asset and Liabil
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AR 2011 PG 87 The following table s
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CORPORATE INFORMATION Board of Dire
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ANNUAL REPORT 2011 - Connacher Oil and Gas

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