«THE ATTACHED CONSOLIDATED FINANCIAL STATEMENTS FORM AN INTEGRAL PART OF THIS MANAGEMENT DISCUSSION AND ANALYSIS AND ARE HEREBY INCLUDED BY REFERENCE ...»
Avanti Energy Inc.
Management Discussion and Analysis
For the years ended December 31, 2014 and 2013
THE ATTACHED CONSOLIDATED FINANCIAL STATEMENTS FORM AN INTEGRAL PART OF THIS
MANAGEMENT DISCUSSION AND ANALYSIS AND ARE HEREBY INCLUDED BY REFERENCE
Avanti Energy Inc. (the "Company", formerly Overlord Capital Ltd.) is an exploration stage company whose common shares trade on the TSX Venture Exchange (“TSX-V”) and is in the business of acquiring, exploring and evaluating oil and gas properties prospective for hydrocarbons. The Company was incorporated as a private company by Certificate of Incorporation issued pursuant to the provisions of the British Columbia Business Corporations Act on March 7, 2011.
On May 31, 2013, the Company announced the successful completion of the acquisitions of Avanti Exploration SA LLC (“Avant SA”) and Avanti Oil, LLC (“Avanti Oil”). As a result, the Company has acquired all of the issued and outstanding interests in Avanti SA and Avanti Oil.
The following management discussion and analysis (“MD&A”), prepared as of April 28, 2015, should be read together with the audited consolidated financial statements and accompanying notes for the year ended December 31, 2014 and related notes hereto, which are prepared in accordance with IFRS. The reader should also refer to the audited financial statements and accompanying notes for the year ended December 31, 2013 and related notes hereto, which are prepared in accordance with IFRS.
All statements in this report that do not directly and exclusively relate to historical facts constitute forward-looking statements. These statements represent the Company’s intentions, plans, expectations and beliefs, and are subject to risks, uncertainties, and other factors of which many are beyond the control of the Company. These factors could cause actual results to differ materially from the Company’s expectations. The Company assumes no obligation to update or revise any forward-looking statements, as a result of new information, future events or otherwise.
FORWARD LOOKING STATEMENTSThe information herein contains forward-looking statements and assumptions. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as “seek”, “anticipate”, “plan”, “continue”, “estimate”, "expect”, “may”, “will”, “project”, “predict”, “potential”, “targeting”, “intend”, “could”, “might”, “should”, “believe” and other similar expressions. Such statements and assumptions also include those relating to guidance, results of operations and financial condition, capital spending and financing sources. By their nature, forward-looking statements are subject to numerous known and unknown risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, actual results may differ materially from those predicted. The Company is exposed to numerous operational, technical, financial and regulatory risks and uncertainties, many of which are beyond its control and may significantly affect anticipated future results.
The financial risks the Company is exposed to include, but are not limited to, access to debt or equity markets and fluctuations in interest rates. The Company is subject to regulatory legislation; compliance with which may require significant expenditures and non-compliance with which may result in fines, penalties or production restrictions.
Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. The Company does not undertake any obligation to update publicly or to revise any of the included forwardlooking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.
OVERALL PERFORMANCEVUA Miller#1 Well, Louisiana, USA The Company currently holds a 25% working interest in the VUA Miller #1 Well The Company drilled, completed and tied-in the well during the year. The well was placed on commercial production in June
2014. Under the agreement with Avanti Exploration, LLC ("Avanti Exploration") the operator, the Company paid 33.33% of the costs of the well to casing point, which totaled US$1.025 million to the 100% interest. After reaching casing point, Avanti paid 25% of the costs of the well (prorated interest) for the balance of the completion work to earn a 25% working-interest in the well.
The well was directionally drilled and was tested during an eight-hour period. The test produced 108 barrels of 49 degrees gravity oil and 30 mcfgd with 1,200 flowing tubing pressure on a 16/64” choke, from the Cockfield reservoir.
Installation of production facilities was completed in April 2014 and the well was placed on production on May 8, 2014.
After a week’s production, the well averaged 196 barrels of oil per day (bopd) and 246 mcf of gas per day, on an 11/64” choke, with 1,245 flowing tubing pressure and a 50% water cut.
The well went off production averaging about 100 bopd and 70% water cut due to water loading and paraffin build up on November 5, 2014. Attempts were made to return the well to flowing status, but were unsuccessful.
A workover to isolate water and install artificial lift commenced in mid-December. The work successfully isolated the lower perforations which tested water, and the well was placed on artificial lift. Since going back on production, the well has averaged approximately 10-12 bopd at a water cut of 82%. The well is marginally economic at current prices. There are additional behind pipe reserves above the current producing zone. Pending oil prices and economics of current zone, the operator will evaluate moving uphole later in the year.
PWK Wells, Louisiana, USA The Company currently holds a 25% interest in the PWK Wells, which consist of two wells.
During the year ended December 31, 2013, the Company entered into a participation agreement (the “Participation Agreement”) with Avanti Exploration, under which the Company acquired a 25% interest in two oil and/or gas wells, known as the PWK 10-1 well and the Powell Lumber #1 well located in the Cowpen Creek Field area in Beauregard Parish, Louisiana.
Under the terms of the Participation Agreement, the Company received an undivided 25% working interest in the PWK 10-1 well and the Powell Lumber #1 well in consideration for the Company contributing 50%, of the cost of the work-over/reentering of these wells. The Participation Agreement also provides that Avanti Exploration will be the operator of the wells.
During the year, the PWK 10-1 well produced at marginal rates of 4-5 bopd.
Subsequent to the year-end, the well was shut in due to low oil prices and the surface artificial lift equipment was moved to the VUA; Miller #1 well.
Forestar 8 Well, Louisiana, USA The Company entered into an agreement with Avanti Exploration and began work on the re-entry of the Forestar 8 well during the year ended December 31, 2013. Under this agreement, the Company paid 50% of the re-entry costs to earn a 25% interest in this well as well as two other nearby wells known as the Dubose and Turnkey Temple Inland. The results obtained during the year ended December 31, 2014 were negative and as a result the Company no longer plans to develop the well. As a result, costs totaling $47,699 were written off to the statement of loss and comprehensive loss during the year ended December 31, 2014.
During the year the operator re-entered the Forestar 8 to test potential behind pipe pays in the Cockfield sands.
Approximately 34 feet in two zones tested water with a slight stain of oil. The zones were subsequently abandoned and the well was left for conversion to saltwater disposal
Temple Inland 1 Well, Louisiana, USA
The Company earned a 25% interest in this well as a result of work completed on the Forestar 8 Well as described above.
During the year, as a result of difficulties with the well, the well was shut in. As a result, during the year ended December 31, 2014 the Company has written off costs incurred of $37,289 to the statement of loss and comprehensive loss.
The Company and Avanti Exploration started working over the well October 31, 2014 and temporarily abandoned the well December 15, 2014 after cementing a squeeze tool in the hole. Multiple attempts to retrieve tool were unsuccessful. The operator is currently evaluating next steps in light of current oil prices. The well was left in a condition whereby it could be easily re-entered with a coiled tubing unit in an effort to prepare the well for a future attempt at retrieving the squeeze tool.
The well did recover oil during the cementing procedures.
Outlook The dramatic decline in oil prices has required Avanti to re-evaluate its marginal oil field strategy in Louisiana. However, recent Louisiana oil prices have shown some recovery and are now above $60 after hitting a low of $45 in January 2015.
Management believes that attractive opportunities still exist in Latin America and Louisiana, however, it will take some time for the realities of the new oil price environment to sink-in and for those opportunities to become actionable.
In the meantime, with the April 2015 Acquisition of CMI Energia S.p.A. the Company has acquired shut-in natural gas field with proved reserves in Italy. Italy is a high value gas market and recent regulatory changes have re-invigorated the E&P business in Italy. Avanti will be looking to add additional oil and gas properties in Italy as a result of this new initiative.
ASSET ACQUISITIONSEffective May 15, 2013, the Company acquired all of the issued and outstanding interests in Avanti SA and Avanti Oil in exchange for 7,500,000 and 3,000,000 common shares respectively.
The acquisition of Avanti SA was treated as an asset acquisition. The fair value of the assets acquired and liabilities assumed
as at the date of acquisition were as follows:
The acquisition of Avanti Oil was treated as an asset acquisition. The fair value of the assets acquired and liabilities assumed
as at the date of acquisition were as follows:
On May 15, 2013 the Company completed (i) a share purchase agreement with Avanti SA pursuant to which the Company acquired all of the issued and outstanding interests in Avanti SA; and (ii) a share purchase agreement with Avanti Oil pursuant to which the Company acquired all of the issued and outstanding interests in Avanti Oil.
The following contingent consideration from the Company is applicable to the Avanti Oil share purchase Agreement:
a. issuance of 2,000,000 common shares to the members of Avanti Oil, or their assignees, upon Avanti Oil entering into an agreement for the re-development of an onshore oil and gas field in Brazil;
b. issuance of 500,000 common shares to the members of Avanti Oil, or their assignees, upon Avanti Oil acquiring an oil and gas asset in South or Latin America;
c. issuance of 500,000 common shares to the members of Avanti Oil, or their assignees, upon Avanti Oil entering into a joint venture agreement for the participation in a bid to acquire oil and gas assets being auctioned by the Government of Brazil;
d. issuance of 1,000,000 common shares to the members of Avanti Oil, or their assignees, upon Avanti Oil commencing a submission of a work program to re-develop the Italy Project (as defined in the Avanti Oil share purchase agreement);
and e. issuance of 500,000 common shares to the members of Avanti Oil, or their assignees, upon Avanti Oil acquiring a minimum of an 87.5% interest in the Italy Project.