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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 20-F
(Mark One)
[ ] Registration statement pursuant to Section 12(b) or 12(g) of
the Securities Exchange Act of 1934.
or
[X] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the fiscal year ended December 31, 2001.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the transition period from ______________ to ______________ .
Commission file number 333-
ENTERRA ENERGY CORP.
(Exact Name of Registrant as Specified in Its Charter)
ALBERTA, CANADA
(Jurisdiction of Incorporation or Organization)
2600, 500-4TH AVENUE S.W.
CALGARY, ALBERTA, CANADA
T2P 2V6
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Shares Canadian Venture Exchange
NASDAQ
Securities registered or to be registered pursuant to Section 12(g) of the
Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
Common Shares, without par value at December 31, 2001: 9,150,622
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 [ ] Item 18 [X]
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
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[ENTERRA ENERGY CORP. LOGO]
2001
ANNUAL REPORT
[PICTURE OF EXECUTIVE OFFICERS]
(L-R) TREVOR SPAGRUD VICE PRESIDENT OPERATIONS, THOMAS J. JACOBSEN CHIEF
OPERATING OFFICER, REG J. GREENSLADE PRESIDENT AND CHIEF EXECUTIVE OFFICER, DON
ALMOND VICE PRESIDENT PRODUCTION, LUC CHARTRAND, C.A. CHIEF FINANCIAL OFFICER.
TABLE OF CONTENTS
REPORT TO THE SHAREHOLDERS 3
FINANCIAL PERFORMANCE AND HIGHLIGHTS 4-5
OPERATIONS REVIEW 6
MANAGEMENT'S DISCUSSION AND ANALYSIS 8
MANAGEMENT & AUDITOR'S REPORTS 14
FINANCIAL STATEMENTS 15
MESSAGE FROM THE CHAIRMAN 26
CORPORATE INFORMATION IBC
CORPORATE PROFILE
ENTERRA ENERGY CORP. IS AN OIL AND GAS COMPANY BASED IN CALGARY, ALBERTA. THE
COMPANY'S FOCUS IS THE EXPLORATION AND DEVELOPMENT OF PETROLEUM AND NATURAL GAS
RESERVES IN ALBERTA AND SASKATCHEWAN. ENTERRA SHARES ARE LISTED FOR TRADING ON
THE NASDAQ (SYMBOL: EENC) AND ON THE TSX VENTURE EXCHANGE (SYMBOL: ENT).
REPORT TO THE SHAREHOLDERS
Enterra Energy is pleased to present its Annual Report for the year ended
December 31, 2001. The Company achieved new highs in production, revenue and
cash flow in 2001, setting the stage for an even stronger 2002.
The acquisition of Big Horn Resources Ltd., effective August 1, resulted in a
complete restructuring of Enterra by providing the company with a substantial
inventory of prospects, along with a proven, full cycle management team.
Enterra's focus changed from an acquisition driven strategy to one of increasing
production and reducing both operating and general and administrative costs.
Significant gains have already been made in these areas. Operating costs in 2001
were lowered to $8.38/boe as compared to $9.58/boe a year earlier. More
significantly, operating costs were reduced from $12.37/boe in the first quarter
of 2001 to $6.22/boe in the fourth quarter of 2001. In addition, general and
administrative expenses were reduced from $3.31/boe in 2001 to $0.81/boe in
2002. These synergies will continue in 2002 as the Company will remain focused
on reducing both operating and administrative costs.
Enterra's average annual production rate increased 66% in 2001 to 1,906 boe/day
from 1,149 boe/day. The Company's exit rate increased 123% to 2,675 boe/day in
2001 from 1,197 boe/day in 2000. Commodity prices, however, did not follow the
same pattern: average commodity prices decreased, by $10.58/boe during 2001.
Despite this erosion in pricing, especially in the latter part of the year, the
Company's netbacks per boe decreased by only $2.46/boe, from $16.98/boe to
$14.52/boe. By aggressively reducing its operating and administrative costs,
Enterra was able to minimize the impact of declining oil and gas prices in 2001.
During 2001, Enterra drilled 20 wells (10.59 net) resulting in 9 oil wells (5.0
net) and 8 gas wells (3.8 net) for a success ratio of 85%. Enterra's current
production consists of 77% oil and 23% natural gas. Reserves in 2001 increased
181% to over 8.1 million boe from 2.9 million boe in 2000. Over 70% of these
reserves are in the proven category.
The Company's overall finding costs for its proved and probable reserves in 2001
was $8.09 per boe, resulting in a recycle ratio of 2 (based on operating
netbacks of $16.18 per boe). However, Enterra's finding costs for its drilling
program alone (i.e. excluding property and corporate acquisitions) were $4.14 in
2001, for a recycle ratio of 3.9.
Enterra strengthened its balance sheet in the first quarter of 2002 by
purchasing 6,123,870 of its Series 1 preferred shares for $2.3 million. These
shares had a redemption value of $5.2 million, resulting in savings of $2.9
million. The Company also sold its Grand Forks property for $5.3 million.
Proceeds from this sale were used to reduce our debt and to provide working
capital.
2002 OUTLOOK
Enterra exited 2001 a much bigger and stronger company than it was one year ago.
Our production exceeded 2,500 boe/day at the end of 2001, providing a strong
cash flow base from which to expand and accelerate our growth. We have a full
cycle, experienced management team with a shared desire to rapidly build Enterra
[PHOTO]
into a significant player in the Canadian oil and gas sector. The fuel for our
growth will come from our substantial inventory of prospects which will be
prioritized and developed based on each prospect's potential impact on the
Company's 2002 production.
Our recent growth has also caused a corresponding increase in our average
trading volumes, especially on Nasdaq (symbol: EENC), providing our shareholders
with better liquidity. The Company has 9.2 million shares currently outstanding.
Both management and the Board of Directors of Enterra are committed to growing
the Company with minimal dilution. The per share results are the critical
numbers by which we gauge Enterra's progress.
In closing, we look forward to accelerated growth in 2002, along with a further
reduction in both operating and administrative expenses.
Enterra is fortunate to have a group of very capable and dedicated employees.
They are the driving force behind the growth of our company. Their efforts, in
conjunction with the guidance and commitment of our experienced Board of
Directors, are greatly appreciated.
[SIGNATURE]
Reg Greenslade, P.Eng.
President and Chief Executive Officer
ENTERRA ENERGY CORP. 2001 ANNUAL REPORT 3
2001 SUMMARY YEAR ENDED DECEMBER 31
YEAR ENDED YEAR ENDED
DEC 31/01 DEC 31/00 CHANGE
------------ ------------ ------
FINANCIAL
-------------------------------------------------------------------------------------------------------
Production revenue $ 20,264,396 $ 16,700,151 21%
Cash flow from operations $ 9,810,268 $ 5,875,500 67%
Per Common Share $ 1.40 $ 1.33 5%
Net earnings $ 1,617,052 $ 2,453,119 -34%
Per Common Share $ 0.23 $ 0.55 -58%
Total assets $ 80,062,558 $ 22,101,468 262%
Long-term debt $ 18,408,904 $ 8,403,000 119%
Working capital (deficiency) $ (2,229,431) $ (3,164,681) -30%
Share capital $ 29,568,263 $ 5,031,846 488%
Average number of shares outstanding during year 6,992,393 4,421,844 58%
Number of shares outstanding at the end of year 9,150,622 4,595,139 99%
PRODUCTION
-------------------------------------------------------------------------------------------------------
AVERAGE DAILY PRODUCTION
Oil (bbls/day) 1,595 1,120 42%
Gas (mcf/day) 1,863 172 983%
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Total (boe/day) 1,906 1,149 66%
EXIT PRODUCTION
Oil (bbls/day) 2,065 1,164 77%
Gas (mcf/day) 3,660 202 1712%
-------------------------------------------------------------------------------------------------------
Total (boe/day) 2,675 1,197 123%
AVERAGE FIELD PRICES DURING YEAR
Oil ($/bbl) $ 30.53 $ 39.79 -23%
Gas ($/mcf) $ 3.66 $ 6.15 -40%
PER BOE INFORMATION
-------------------------------------------------------------------------------------------------------
Revenue $ 29.14 $ 39.72 -27%
Operating expenses $ 8.38 $ 9.58 -13%
Royalties, net of ARTC $ 4.58 $ 7.87 -42%
-------------------------------------------------------------------------------------------------------
OPERATING NETBACKS $ 16.18 $ 22.27 -27%
General and administrative $ 0.81 $ 3.31 -76%
Interest $ 0.85 $ 1.98 -57%
-------------------------------------------------------------------------------------------------------
CORPORATE NETBACKS $ 14.52 $ 16.98 -14%
Restructuring charges $ 1.34 -- N/A
Income taxes $ 0.98 $ 4.10 -76%
Depletion and depreciation $ 9.88 $ 7.04 40%
-------------------------------------------------------------------------------------------------------
NET EARNINGS $ 2.32 $ 5.84 -60%
4 ENTERRA ENERGY CORP. 2001 ANNUAL REPORT
2001 HIGHLIGHTS
o INCREASED EXIT PRODUCTION RATE BY 123% FROM 1,197 BOE/DAY IN 2000 TO 2,675
BOE/DAY IN 2001
o INCREASED AVERAGE ANNUAL PRODUCTION BY 66% FROM 1,149 BOE/DAY IN 2000 TO
1,906 BOE/DAY IN 2001
o IMPROVED CASH FLOW BY 67% FROM $5.88 MILLION IN 2000 TO $9.81 MILLION IN
2001
o REDUCED OPERATING COSTS PER BOE BY 13% TO $8.38 PER BOE IN 2001 FROM $9.58
PER BOE IN 2000
o REDUCED G&A COSTS PER BOE BY 76% TO $0.81 PER BOE IN 2001 FROM $3.31 PER
BOE IN 2000
o INCREASED REVENUE BY 21% FROM $16.7 MILLION IN 2000 TO $20.3 MILLION IN
2001
o IMPROVED CASH FLOW PER SHARE BY 5% FROM $1.33 IN 2000 TO $1.40 IN 2001
[BAR CHART] [BAR CHART] [BAR CHART]
2001 PRODUCTION 2001 RESERVES 1998-2001 PRODUCTION
[BAR CHART] [BAR CHART] [BAR CHART]
REVENUE: 1998-2001 (CDN $) CASH FLOWS 1998-2001 (CDN $) CASH FLOW PER SHARE:
1998-2001 (CDN $)
ENTERRA ENERGY CORP. 2001 ANNUAL REPORT 5
OPERATIONS REVIEW
The acquisition of Big Horn in August of 2001 was the critical event which
changed Enterra from an acquisition driven entity into one focused on the
exploitation of its current properties and the development of its prospects.
Big Horn's core areas included the Peace River Arch area of Alberta, West
Central Alberta and South West Saskatchewan. These areas are also home to
Enterra's core fields of Mitsue, Sylvan Lake and the Altares, B.C. exploration
prospect. Enterra's current focus is to grow production in these areas while
reducing our operating expenses in order to maximize our internal cash flows in
2002.
Enterra has a substantial inventory of prospects, the development of which has
the potential to double the size of the Company's existing production and
reserve base.
The following represents a sampling of Enterra's activity in 2001 and early
2002:
NORTHWEST ALBERTA & BC
ALTARES
Enterra has a 10,000 acre exploration farmin in Northeast BC. The Altares
prospect sits adjacent to the 200+ Bcf Kobes Creek gas field. There are six
zones of production in the area, the Cretaceous Bluesky, Cadomin, Triassic
Baldonnel, Charlie Lake / Halfway and Debolt. Each zone has potential
deliverability of 1 to 5 mmcf/day and reserves of 2 to 5 Bcf of gas. Enterra
also purchased 5,000 acres of crown land to completely secure the prospect.
Enterra drilled the first test well during Q3, 2001 encountering gas in the
Cadomin and Charlie Lake / Halfway intervals. The Cadomin, which initially
appeared very prolific, flowed 4 mmcf/day equivalent on a drill stem test and
then proved to be marginal after extensive testing determined that reservoir
quality deteriorated significantly away from the wellbore. Enterra has committed
to drill an additional well on the farmin lands in 2002 that will test the
prolific Debolt formation. Enterra's working interest in the Altares farmin
lands is 22.15% and in the Crown lands is 40%.
WORSLEY
A new Montney oil pool was discovered in Northwest Alberta in 1998. The Monte
reservoir consists of light oil trapped above water. Enterra plans to develop
this pool in 2002 utilizing horizontal drilling technology. There is potential
for at least four wells on Company lands with each well capable of producing 100
bbls/day and reserves of 200 mbbls. Solution gas will also be tied into existing
gathering systems and processed at a nearby gas plant. The Company has a 50%
working interest in this play. An analogous pool has been developed in the area
resulting in the first horizontal well going on production in late 2000 at 300
bbls/day and has produced in excess of 75 mbbls of reserves to date.
GORDONDALE
Enterra acquired interests ranging from 30% to 100% in five contiguous sections
of land in the Gordondale area of Northwest Alberta. This exploration area is
gas prone in up to eight formations ranging from the Doe Creek at depths of less
than 200 m to the Debolt formation at a depth of 2,450 m. Enterra shot a 3-D
seismic program over the area in 2001 and identified several locations with
multi zone potential. In early 2002, the first well was drilled, encountering
gas potential in the Kiskatinaw, Taylor Flats, Montney and Halfway formations.
The Company completed the Kiskatinaw formation which had an initial production
rate of approximately 2 mmcf/day. Enterra has plans to drill several more
development and exploration wells at Gordondale and estimates net deliverability
from the area could exceed 500 boe/day.
ROLLA
A significant Dunvegan gas pool was discovered in Northwest Alberta in late
2000. Two wells were drilled in 2001 that are each capable of producing over 1
mmcf/day. Engineering data and further geology determined that the pool could
contain more than 10 Bcf of recoverable gas reserves. The gas was tied into a
nearby plant in early 2002. The two wells are currently flowing a combined rate
1 mmcf/day net to Enterra. The Company has also identified other locations on
its lands that will be drilled in 2002. Enterra has a 50% working interest at
Rolla.
CENTRAL ALBERTA
SOUNDING LAKE
Sounding Lake continues to be Enterra's largest area in terms of production,
representing approximately 25% of the Company's 2001 production. Enterra's focus
on the area will remain strong through 2002 with an aggressive drilling schedule
combined with additional reduction in operating costs. The majority of
production and future activity in the area will target Dina and Cummings oil. A
highlight at Sounding Lake in 2001 was the discovery of a new Belly River gas
pool.
6 ENTERRA ENERGY CORP. 2001 ANNUAL REPORT
[MAP]
Two wells are now producing from this pool at facility restricted rates of 1.5
mmcf/day net to the Company. Reserves are estimated at 2 Bcf of gas. Enterra
also structured a unique farmout arrangement to construct a central facility,
optimize and infill drill the Sounding Lake North oil pool. This farmout
arrangement will maximize value to Enterra by eliminating required 2002 capital
expenditures and reducing operating expenses.
Enterra will also continue development of the Sounding Lake East, Rex oil
discovery. The Company will shoot a 3-D seismic survey in mid 2002 to
substantiate four geologically defined locations. The discovery well, drilled in
1997, has produced 65 mbbls of oil and is still producing 50 bbls/day.
SYLVAN LAKE
Enterra continues to be excited about the Pekisko infill development potential
at Sylvan Lake. Geological mapping and petrophysics suggest that there are at
least six infill drilling locations. Defined by their proximity to an area of
the reservoir that has undergone dolomitization. This process increases the
porosity and permeability of the predominately limestone reservoir. Although the
best producer at Sylvan Lake is capable of producing in excess of 100 bbls/day,
Enterra is targeting production from the six infill wells to be 75 bbls/day of
oil per well.
Enterra also successfully recompleted a suspended well at Sylvan Lake to a
Viking gas producer. This well is expected to be tied in and on stream by June
2002 at an initial rate of 1 mmcf/day.
SOUTHWEST SASKATCHEWAN
SUPERB
Enterra acquired a shut in Waseca oil pool in Southwest Saskatchewan for $2.8
million in June of 2001. The Company equipped and reactivated four existing
producers. Combined gross production from these wells is 250 bbls/day. Late in
2001, Enterra added four Waseca infill oil wells.
NEW PROSPECTS
One of Enterra's most valuable asset is its inventory of future projects. The
development of these prospects has the potential to double the size of the
Company's existing production and reserve base. New prospects are constantly
added to our inventory in order to maintain our growth from year to year. The
Company's strategy is to maintain a balanced inventory of exploration and
development prospects.
ENTERRA ENERGY CORP. 2001 ANNUAL REPORT 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
The management discussion and analysis should be read in conjunction with the
audited consolidated financial statements of the Company included in this Annual
Report. All amounts are stated in Canadian dollars except where otherwise
indicated. Natural gas volumes have been converted to a crude oil equivalent
using a ratio of 6 mcf to 1 bbl of oil.
OVERVIEW
Enterra achieved significant gains in 2001 in terms of production, revenue and
cash flow. Effective August 1, 2001 Enterra completed its takeover of Big Horn
Resources Ltd., resulting in a doubling of its reserve base, a large inventory
of drilling prospects, a substantial land position and a new management team.
The Company's focus changed from an acquisition driven strategy to one based on
exploitation of current properties along with selective high impact exploration
plays. Both production and cash flow increased by more than 60% in 2001, an
impressive achievement given the rapid erosion of product prices in the second
half of the year. There were immediate synergies achieved by merging Big Horn's
operations with Enterra, as evidenced by a 13% reduction in operating costs per
boe and a 75% reduction in general and administrative costs per boe.
SUMMARIZED FINANCIAL AND OPERATIONAL DATA
(in Thousand's except for volumes and per share amounts)
YEAR 2001 YEAR 2000 CHANGE
----------- ----------- ------
Exit production rate (boe per day) 2,675 1,197 +123%
Annual production revenue $ 20,264 $ 16,700 +21%
Average annual production volumes (boe per day) 1,906 1,149 +66%
Cash flow from operations for the year $ 9,810 $ 5,875 +67%
Cash flow per share for the year $ 1.40 $ 1.33 +5%
Earnings (including $929,000 of one-time restructuring charges in 2001) $ 1,617 $ 2,453 -34%
Earnings per share for the year $ 0.23 $ 0.55 -58%
Average number of shares outstanding during year 6,992,393 4,421,844 +58%
Average price per bbl of oil during year $ 30.53 $ 39.79 -23%
Average price per mcf of natural gas during year $ 3.66 $ 6.15 -40%
Operating costs per boe during year $ 8.38 $ 9.58 -13%
General and administrative expenses per boe during year $ 0.81 $ 3.31 -76%
PRODUCTION REVENUE
Production revenue increased by 21% in 2001 mainly due to volume increases from
the acquisition of the Grand Forks property in Q1 and the Big Horn acquisition
in Q3. Higher commodity prices were also in effect, especially for gas, in the
first half of 2001. Average oil prices received in 2001 were $30.53 per bbl
compared with $39.79 per bbl in 2000, a 23% decrease. Average gas prices
received in 2001 were $3.66 per mcf compared to $6.15 per mcf in 2000, a 40%
decrease.
The Company drilled 20 wells (10.59 net) in 2001, resulting in 9 oil wells (4.97
net) and 8 gas wells (3.78 net) for a success ratio of 85%. Enterra's production
in 2001 averaged 1,906 boe/day, consisting of 1,595 bbls/day of oil and 1,863
mcf/day of natural gas, for a mix of 84% oil and 16% natural gas.
The Company exited 2001 at a rate of 2,675 boe/day, consisting of 2,065 bbls/day
of oil and 3,660 mcf/day of natural gas, for a mix of 77% oil and 23% natural
gas. This represents a 123% increase over the 2000 exit rate of 1,197 boe/day.
[BAR CHART]
REVENUE: 1998-2001 (CDN $)
8 ENTERRA ENERGY CORP. 2001 ANNUAL REPORT
PRODUCTION REVENUE
(in Thousand's except for volumes and pricing)
YEAR 2001 YEAR 2000 CHANGE
--------- --------- ------
Crude oil and natural gas liquids $ 7,773 $ 6,312 +23%
Natural gas 2,491 388 +542%
----------------------------------------------------------------------------------------------------
Total production revenue $ 20,264 $ 16,700 +21%
VOLUMES
Average oil production during year (in bbls/day) 1,595 1,120 +42%
Average gas production during year (in mcf/day) 1,863 172 +983%
----------------------------------------------------------------------------------------------------
Average total production during year (in boe/day) 1,906 1,149 +66%
Exit oil production (in bbls/day) 2,065 1,164 +77%
Exit gas production (in mcf/day) 3,660 202 +1712%
----------------------------------------------------------------------------------------------------
Exit total production (in boe/day) 2,675 1,197 +123%
PRICING
Average price received per bbl of oil during year $ 30.53 $ 39.79 -23%
Average price received per mcf of natural gas during year $ 3.66 $ 6.15 -40%
PRODUCTION EXPENSES
Production expenses increased by 45% in 2001 as a result of the higher
production levels generated during the year. Enterra was able to reduce its
operating costs on a per boe basis by 13% as a result of the early synergies
from the Big Horn acquisition. Production expenses per boe in Q4, 2001 were
$6.22, the lowest level ever achieved by Enterra. These improvements will
continue throughout 2002.
PRODUCTION EXPENSES
(in Thousand's except for percentages and per boe amounts)
YEAR 2001 YEAR 2000 CHANGE
--------- --------- ------
Production expenses $ 5,830 $ 4,030 +45%
As a percentage of
production revenue 29% 24% +21%
Production expenses per boe $ 8.38 $ 9.58 -13%
ROYALTIES
Royalties, which include Crown, freehold and overriding royalties, decreased by
4% in 2001 as a result of the lower commodity prices in effect during 2001,
especially the lower gas prices in the latter half of the year.
ROYALTIES
(in Thousand's except for percentages and per boe amounts)
YEAR 2001 YEAR 2000 CHANGE
--------- --------- ------
Royalties, net of Alberta
Royalty Tax Credit $ 3,182 $ 3,310 -4%
As a percentage of
production revenue 16% 20% -20%
Royalties per boe $ 4.57 $ 7.87 -42%
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased by 59% in 2001 as a result of the
substantial synergies generated by the merger of the Big Horn operations with
Enterra. Overhead recovery costs, which are a recovery of overhead costs related
to capital expenditures, also contributed to reduce the general and
administrative costs in 2001.
GENERAL AND ADMINISTRATIVE EXPENSES
(in Thousand's except for percentages and per boe amounts)
YEAR 2001 YEAR 2000 CHANGE
--------- --------- ------
General and
administrative expenses $ 565 $ 1,391 -59%
As a percentage of
production revenue 3% 8% -63%
General and administrative
expenses per boe $ 0.81 $ 3.31 -76%
INTEREST EXPENSE
Interest expense decreased in 2001 by 29% mainly due to the lower interest rates
in effect during 2001 and to a lower average outstanding loan balance during the
first half of 2001.
INTEREST EXPENSE
(in Thousand's except for percentages and per boe amounts)
YEAR 2001 YEAR 2000 CHANGE
--------- --------- ------
Interest expense $ 589 $ 833 -29%
As a percentage of
production revenue 3% 5% -40%
Interest expense per boe $ 0.85 $ 1.98 -57%
ENTERRA ENERGY CORP. 2001 ANNUAL REPORT 9
DEPLETION AND DEPRECIATION
Depletion and depreciation expense increased significantly in 2001, both in
total value (up 132%) and as a percentage of revenue (up 89%). The increase is
due to a higher production rate and to a higher depletable base as a result of
the Big Horn merger.
DEPLETION AND DEPRECIATION
(in Thousand's except for percentages and per boe amounts)
YEAR 2001 YEAR 2000 CHANGE
--------- --------- ------
Depletion and
depreciation expense $6,870 $2,960 + 132%
As a percentage of
production revenue 34% 18% + 89%
Depletion and depreciation
expense per boe $ 9.88 $ 7.04 + 40%
RESTRUCTURING CHARGES
Enterra incurred $929,037 in restructuring charges during 2001 in conjunction
with the acquisition of Big Horn. These charges are made up of severance and
termination payments paid to former officers, employees and consultants of
Enterra Energy Corp.
INCOME AND CAPITAL TAXES
Income taxes decreased by 60% in 2001 as a result of the reduced earnings.
Current income taxes were substantially reduced as a result of the Big Horn
acquisition, which provided the basis for a more effective tax structure within
the Enterra group.
INCOME AND CAPITAL TAXES
(in Thousand's except for percentages and per boe amounts)
YEAR 2001 YEAR 2000 CHANGE
--------- --------- ------
Income tax expense $ 682 $ 1,722 - 60%
As a percentage of
production revenue 3% 10% - 70%
Income tax expense per boe $ 0.98 $ 4.10 - 76%
ESTIMATED TAX POOLS
Canadian oil and gas
property expense (COGPE) $16,832 $ 7,654
Canadian exploration
expense (CEE) 1,606 --
Canadian development
expense (CDE) 6,250 2,666
Undepreciated capital
cost (UCC) 18,462 6,680
Other 2,152 2,560
------- ------- ----
$45,302 $19,560 +132%
EARNINGS
Net earnings for the year came to $1,617,055 which is a 34% decrease from 2000
($2,453,119). Despite the increased production in 2001 the Company was subject
to a pricing environment which was, on average, 27% lower in 2001 than the
previous year. Enterra's earnings were also reduced by one-time restructuring
charges of almost $1 million. And since the depletion and depreciation expense
is not affected by pricing, i.e. a decrease in commodity prices does not result
in a corresponding decrease in depletion and depreciation expense, the 2001
depletion and depreciation expense was substantially higher in 2001 than 2000.
The average number of shares outstanding in 2001 also increased by 58% which
contributed to the decline in earnings per share in 2001 to $0.23 per share, a
58% decrease from 2000.
EARNINGS
(in Thousand's except for number of shares and per share amounts)
YEAR 2001 YEAR 2000 CHANGE
--------- --------- ------
Earnings from operations $ 3,228 $ 4,175 - 23%
Less restructuring charges (929) --
Less income taxes (682) (1,722)
---------- ---------- ----
Net earnings $ 1,617 $ 2,453 - 34%
Net earnings per share $ 0.23 $ 0.55 - 58%
Average number of shares
outstanding during year 6,992,393 4,421,844 + 58%
CASH FLOW
Cash flow from operations grew by 67% in 2001 to $9,810,268. This amount
included a $761,302 net gain from the settlement of a hedging contract in the
first quarter of 2001. Cash flow per share in 2001 was $1.40 per share, a 5%
increase from 2000.
CASH FLOW
(in Thousand's except for number of shares and per share amounts)
YEAR 2001 YEAR 2000 CHANGE
--------- --------- ------
Net earnings $ 1,617 $ 2,453 - 34%
Add back depletion
and depreciation 6,870 2,960
Add back future income taxes 562 406
Add back deferred gain on
hedge, net of amortization 761 --
Add back non-cash
interest expense -- 56
---------- ---------- ----
Cash flow from operations $ 9,810 $ 5,875 + 67%
Cash flow per share $ 1.40 $ 1.33 + 5%
Average number of shares
outstanding during year 6,992,393 4,421,844 + 58%
10 ENTERRA ENERGY CORP. 2001 ANNUAL REPORT
(BAR CHART)
CASH FLOWS 1998-2001 (CDN $)
CAPITAL EXPENDITURES
Capital expenditures for 2001 were $49,309,000 (excluding $1.7 million received
in proceeds from minor dispositions and $11.3 million related to the tax effect
of the Big Horn acquisition). These expenditures include the acquisition of the
Grand Forks property in Q1 ($5.5 million), the Big Horn corporate acquisition in
Q3 ($35.6 million) and the Company's regular 2001 drilling program ($8.2
million). Enterra's finding costs for 2001 were broken down among these three
groups in order to show the different costs as they relate to the assets
acquired through the Grand Forks property acquisition, the Big Horn corporate
acquisition and the "drill bit".
The finding costs for corporate acquisitions are typically more expensive than
either property acquisition or in-house drilling expenditures because the assets
being acquired include undeveloped land, inventory of prospects and, in the case
of the Big Horn acquisition, a full cycle management team.
FINDING COSTS PER BOE***
(capital expenditures are in thousand's)
GRAND FORKS BIG HORN 2001
PROPERTY CORPORATE DRILLING
ACQUISITION ACQUISITION PROGRAM
----------- ----------- --------
Proved reserves $ 7.10 $ 15.12 $ 6.00
Proved and 1/2
probable reserves $ 6.82 $ 12.65 $ 4.90
Proved and
probable reserves $ 6.57 $ 10.87 $ 4.14
-------- -------- -------
Capital expenditures $ 5,500 $ 35,600 $ 8,200
*** Reserve information based on January 1, 2002 reserve report prepared by
McDaniel & Associates Consultants Ltd. of Calgary, AB
RESERVE INFORMATION
Enterra increased its reserve base by 181% in 2001. The Company had proved
reserves of 5,887 mboe and probable reserves of 2,266.5 mboe, for a total of
8,153.5 mboe.
SUMMARIZED RESERVE INFORMATION***
OIL RESERVES GAS RESERVES TOTAL RESERVES
(MBBLS) (MMCF) (MBOE)
------------ ------------ --------------
Proved reserves 4,103.3 10,702.0 5,887.0
Probable reserves 1,231.9 6,207.8 2,266.5
------- -------- -------
Total proved and probable 5,335.2 16,909.8 8,153.5
*** Based on January 1, 2002 reserve report prepared by McDaniel & Associates
Consultants Ltd. of Calgary, AB
TOTAL PROVED AND PROBABLE RESERVES (PER SHARE)
YEAR 2001 YEAR 2000 CHANGE
--------- --------- ------
Total proved and probable
reserves (mboe, based on
escalating prices) 8,153.5 2,904.9 + 181%
Total number of shares
outstanding at year-end 9,150,622 4,595,139 + 99%
Total proved and
probable reserves on
a per share basis 0.89 0.63 + 41%
ENTERRA ENERGY CORP. 2001 ANNUAL REPORT 11
SUMMARIZED PRESENT WORTH VALUES***
(before income taxes, in `000s)
@ 0.0% @ 10.0% @ 12.0% @ 15.0%
---------- --------- --------- ---------
Proved reserves $ 93,130.4 $65,767.2 $62,321.7 $57,864.7
Probable reserves $ 36,963.5 $20,984.5 $19,205.9 $16,992.0
---------- --------- --------- ---------
Total proved and probable $130,093.9 $86,751.7 $81,527.6 $74,856.7
Total proved and probable per share (based on 9,150,622 shares) $ 14.22 $ 9.48 $ 8.91 $ 8.18
*** BASED ON JANUARY 1, 2002 RESERVE REPORT PREPARED BY MCDANIEL USING CONSTANT
PRICES
@ 0.0% @ 10.0% @ 12.0% @ 15.0%
---------- --------- --------- ---------
Proved reserves $ 73,929.5 $50,785.9 $47,918.1 $44,225.7
Probable reserves $ 31,829.1 $17,587.3 $16,028.1 $14,096.0
---------- --------- --------- ---------
Total proved and probable $105,758.6 $68,373.2 $63,946.2 $58,321.7
Total proved and probable per share (based on 9,150,622 shares) $ 11.56 $ 7.47 $ 6.99 $ 6.37
*** BASED ON JANUARY 1, 2002 RESERVE REPORT PREPARED BY MCDANIEL USING
ESCALATING PRICES
LIQUIDITY AND CAPITAL RESOURCES
The Company completed a public offering in the United States in January of 2001,
consisting of 1,000,000 units of one common share and one share purchase warrant
for US$4.55 per unit. The share purchase warrants will expire on May 17, 2002
and are exercisable at US$3.50 per share.
Effective August 1, 2001, Enterra acquired 100% of Big Horn for cash of $2.2
million (not including acquisition costs) and the issuance of 3,496,436 common
shares and 7,418,336 preferred shares. Enterra has also repurchased, through its
previously announced share buyback program, 232,500 of its common shares during
2001. The Company currently has 9,150,622 common shares outstanding.
The Company's total debt, including working capital deficiency and preferred
shares, at December 31, 2001 was $26.9 million.
RESERVE CONTINUITY OIL AND GAS (MBOE)
PROVED PROBABLE TOTAL
------- -------- -------
DECEMBER 31, 2000 2,261.4 643.5 2,904.9
Discoveries and extensions 1,224.8 615.2 1,840.0
Purchases 3,277.1 981.7 4,258.8
Dispositions (113.1) (30.0) (143.1)
Production (695.5) - (695.5)
Revision of prior estimates (67.7) 56.1 (11.6)
------- ------- -------
DECEMBER 31, 2001 5,887.0 2,236.7 8,153.5
Subsequent to December 31, 2001, the Company took several steps to strengthen
its balance sheet and its working capital position:
(a) The Company sold its Grand Forks property for $5.3 million in April 2002.
Proceeds from the sale were applied to debt reduction and working capital.
(b) The Company repurchased 6,123,870 of its Series 1 preferred shares for $2.3
million in March of 2002, resulting in a gain on redemption of $2,905,290.
The remaining 1,294,466 preferred shares are redeemable for $0.85 per share
at any time by Enterra. Subsequent to August 16, 2002 they are retractable
at the option of the holder for $0.85 per share.
SUMMARIZED BALANCE SHEET INFORMATION
(in Thousand's except per share amounts)
YEAR 2001 YEAR 2000 CHANGE
--------- --------- ------
Working capital (deficiency) $ (2,229) $ (3,165) - 30%
Bank loan $ 18,409 $ 8,403 + 119%
Series 1 preferred shares $ 6,306 $ -- N/A
Shareholders' equity $ 33,524 $ 7,371 + 355%
Shareholders' equity on a
per share basis $ 3.66 $ 1.60 + 129%
12 ENTERRA ENERGY CORP. 2001 ANNUAL REPORT
(PIE CHART)
DEVELOPED ACRES
GROSS 41,605
NET (54%) 22,646
UNDEVELOPED ACRES
GROSS 89,296
NET (66%) 58,590
TOTAL ACRES
GROSS 130,901
NET (62%) 81,236
Because of the volatility in crude oil pricing in the second half of 2001,
Enterra implemented a six-month costless collar on 500 bbls/day of oil
production which started on November 1, 2001 and will expire on April 30, 2002.
The costless collar has a floor of $20.00 US/bbl with a ceiling of $24.00
US/bbl.
The Company is poised for substantial growth in 2002.
Enterra's inventory of prospects will be prioritized and developed based on each
prospect's potential impact on the Company's 2002 production. The focus will be
on prospects which can add immediate value to the Company.
ENTERRA ENERGY CORP. 2001 ANNUAL REPORT 13
MANAGEMENT'S REPORT TO THE SHAREHOLDERS
Management is responsible for the preparation of the financial statements and
the consistent presentation of all other financial information in this annual
report. The financial statements have been prepared in accordance with generally
accepted accounting principles, and the other financial information appearing
throughout the annual report is presented on a basis consistent with the
financial statements.
Management maintains a system of internal controls to provide reasonable
assurance that assets are safeguarded and that relevant and reliable financial
information is produced in a timely manner.
External auditors, appointed by the shareholders, have examined the financial
statements. Their report is presented below. The Audit Committee of the Board of
Directors has reviewed the financial statements with management and the external
auditors. The Board of Directors has approved the financial statements on the
recommendation of the Audit Committee.
/s/ John McGrain /s/ Reg Greenslade
John McGrain Reg Greenslade, P.Eng.
Chairman President and Chief Executive Officer
AUDITOR'S REPORT
To the Shareholders
We have audited the consolidated balance sheets of Enterra Energy Corp. as at
December 31, 2001 and 2000 and the consolidated statements of earnings and
retained earnings and cash flows for the years then ended. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards and auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 2001
and 2000 and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles.
We also audited the adjustments described in note 2(e) to the consolidated
financial statements that were applied to restate the consolidated financial
statements for the year ended December 31, 1999. In our opinion, such
adjustments are appropriate and have been properly applied. The 1999 financial
statements, prior to such adjustments, were audited by other auditors who
expressed an opinion without reservation on these statements in their report
dated March 31, 2000.
Canadian generally accepted accounting principles vary in certain significant
respects from accounting principles generally accepted in the United States.
Application of accounting principles generally accepted in the United States
would have affected results of operations for each of the years in the
three-year period ended December 31, 2001 and shareholders' equity as at
December 31, 2001 and 2000 to the extent summarized in note 13 to the
consolidated financial statements.
Chartered Accountants
(Signature) KPMG LLP
Calgary, Canada
March 6, 2002, except as to note 12,
which is as of April 12, 2002
14 ENTERRA ENERGY CORP. 2001 ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
(Expressed in Canadian Dollars)
DECEMBER 31 DECEMBER 31
2001 2000
(RESTATED - NOTE 2(E))
----------- ----------------------
ASSETS
CURRENT ASSETS
Cash $ 43,364 $ 1,443
Accounts receivable 6,296,639 2,413,054
Prepaid expenses and deposits 583,058 91,942
----------- -----------
6,923,061 2,506,439
PROPERTY AND EQUIPMENT (NOTE 4) 73,139,497 18,335,474
INVESTMENTS (NOTE 5) -- 422,000
DEFERRED SHARE ISSUE COSTS -- 837,555
----------- -----------
$80,062,558 $22,101,468
=========== ===========
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 8,989,389 $ 4,354,949
Income taxes payable 163,103 1,316,171
----------- -----------
9,152,492 5,671,120
BANK INDEBTEDNESS (NOTE 6) 18,408,904 8,403,000
Provision for future abandonment and site restoration costs 751,088 250,847
Future income tax liability (note 7) 11,159,101 405,888
Deferred gain (note 10) 761,302 --
Series 1 preferred shares (note 9) 6,305,586 --
----------- -----------
46,538,473 14,730,855
----------- -----------
Shareholders' Equity
Share capital (note 8) 29,568,263 5,031,846
Retained earnings 3,955,822 2,338,767
----------- -----------
33,524,085 7,370,613
----------- -----------
Commitments (note 11)
Subsequent events (note 12)
----------- -----------
$80,062,558 $22,101,468
=========== ===========
Approved on behalf of the Board:
/s/ Reg Greenslade /s/ John McGrain
Reg Greenslade, P.Eng. John McGrain
Director Director
See accompanying notes to consolidated financial statements
ENTERRA ENERGY CORP. 2001 ANNUAL REPORT 15
CONSOLIDATED STATEMENTS OF EARNINGS AND
RETAINED EARNINGS
Year Ended December 31 (Expressed in Canadian Dollars)
2001 2000 1999
(RESTATED - NOTE 2(E)) (RESTATED - NOTE 2(E))
------------ ---------------------- ----------------------
REVENUE
Oil and gas $ 20,264,396 $ 16,700,151 $ 2,515,456
EXPENSES
Royalties, net of ARTC 3,182,340 3,310,138 442,335
Production 5,829,613 4,029,703 782,281
General and administrative 565,270 1,391,297 862,546
Interest on long-term debt 589,169 833,342 131,872
Depletion, depreciation and future site restoration 6,869,912 2,960,493 704,980
------------ ------------ ------------
17,036,304 12,524,973 2,924,014
------------ ------------ ------------
EARNINGS (LOSS) BEFORE THE FOLLOWING 3,228,092 4,175,178 (408,558)
Restructuring charges (929,037) -- --
Gain on sale of investments -- -- 160,000
------------ ------------ ------------
EARNINGS (LOSS) BEFORE INCOME TAXES 2,299,055 4,175,178 (248,558)
Income taxes (note 7):
Current 120,000 1,316,171 --
Future 562,000 405,888 --
------------ ------------ ------------
682,000 1,722,059 --
NET EARNINGS (LOSS) 1,617,055 2,453,119 (248,558)
RETAINED EARNINGS (DEFICIT):
BEGINNING OF YEAR, AS PREVIOUSLY REPORTED 2,645,504 314,304 363,831
Adjustment for change in accounting policy (note 2(e)) (306,737) (428,656) (229,625)
------------ ------------ ------------
BEGINNING OF YEAR, AS RESTATED 2,338,767 (114,352) 134,206
------------ ------------ ------------
END OF YEAR $ 3,955,822 $ 2,338,767 $ (114,352)
============ ============ ============
EARNINGS (LOSS) PER SHARE:
Basic $ 0.23 $ 0.55 $ (0.10)
Diluted $ 0.23 $ 0.53 $ (0.10)
============ ============ ============
See accompanying notes to consolidated financial statements
16 ENTERRA ENERGY CORP. 2001 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in Canadian Dollars)
2001 2000 1999
(RESTATED - NOTE 2(E)) (RESTATED - NOTE 2(E))
------------ ---------------------- ----------------------
CASH PROVIDED BY (USED IN):
OPERATIONS
Net earnings (loss) $ 1,617,055 $ 2,453,119 ($ 248,558)
Add non-cash items:
Depletion and depreciation 6,869,912 2,960,493 704,980
Future income taxes 562,000 405,888 --
Deferred gain 1,680,031 -- --
Amortization of deferred gain (918,729) -- --
Gain on sale of investments (160,000)
Non-cash interest expense -- 56,000 --
------------ ------------- -------------
Funds from operations 9,810,269 5,875,500 296,422
Net change in non-cash working capital items:
Accounts receivable (1,371,654) (1,728,267) (453,399)
Prepaid expenses (161,941) (91,942) --
Accounts payable and accrued liabilities 2,205,753 3,667,907 464,342
Income taxes payable (1,153,068) 1,316,171
------------ ------------- -------------
9,329,359 9,039,369 307,365
------------ ------------- -------------
FINANCING
Bank indebtedness 1,055,904 5,803,000 1,800,000
Issue of common shares, net of issue costs 5,457,625 1,312,517 1,237,278
Repurchase of shares (753,300) -- --
Deferred share issue costs -- (837,555) --
------------ ------------- -------------
5,760,229 6,277,962 3,037,278
------------ ------------- -------------
INVESTING
Capital assets additions (14,958,086) (20,853,515) (3,771,581)
Acquisition of Big Horn Resources Ltd. (2,190,048) -- --
Acquisition of subsidiaries, net of cash (400,000)
Proceeds on disposal of property and equipment 1,700,500 5,764,570 796,800
Investments 422,000 (250,000) --
Future abandonment and site restoration costs (22,033) (19,231) (1,413)
------------ ------------- -------------
(15,047,667) (15,358,176) (3,376,194)
------------ ------------- -------------
Increase (decrease) in cash 41,921 (40,845) (31,551)
Cash, beginning of year 1,443 42,288 73,839
------------ ------------- -------------
Cash, end of year $ 43,364 $ 1,443 $ 42,288
============ ============= =============
Funds from operations per share:
Basic $ 1.40 $ 1.33 $ 0.10
Diluted $ 1.40 $ 1.23 $ 0.10
============ ============= =============
During 2001, the Company paid $589,169 (2000 - $815,742 and 1999 - $131,872) of
interest on long-term debt.
See accompanying notes to consolidated financial statements
ENTERRA ENERGY CORP. 2001 ANNUAL REPORT 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2001 and 2000
1. CORPORATE HISTORY
Enterra Energy Corp. (formerly Westlinks Resources Ltd.)("Enterra")
was formed on June 30, 1998 by the amalgamation of Temba Resources
Ltd. ("Temba") and PTR Resources Ltd. ("PTR") in a share-for-share
exchange. The combination was recorded using the purchase method of
accounting with Temba being identified as the acquirer.
Effective August 1, 2001 Enterra acquired 100% of the common shares of
Big Horn Resources Ltd. ("Big Horn"), a junior oil and gas company
listed on the Toronto Stock Exchange, by the way of a plan of
arrangement. Consideration consisted of cash of $2,205,447 (not
including acquisition costs) and the issuance of 3,496,436 common
shares and 7,418,332 preferred shares. The terms of the Series 1
preferred shares are described in note 9. In addition, approximately
460,915 Enterra options were issued in exchange for Big Horn options.
Effective December 10, 2001 Westlinks Resources Ltd. changed its name
to Enterra Energy Corp. A new stock option plan was also adopted at
that time.
2. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements are prepared in accordance
with Canadian generally accepted accounting principles. Substantially
all of the exploration and production activities of the Company are
conducted jointly with others and these financial statements reflect
only the Company's proportionate interest in such activities. The
consolidated financial statements include the accounts of Big Horn
effective from August 1, 2001.
(a) Petroleum and natural gas properties
The Company follows the "full cost" method of accounting for petroleum
and natural gas properties. All costs related to the exploration for
and the development of oil and gas reserves are capitalized into a
single cost centre representing the Company's activity which is
undertaken exclusively in Canada. Costs capitalized include land
acquisition costs, geological and geophysical expenditures, lease
rentals on undeveloped properties and costs of drilling productive and
non-productive wells. Proceeds from the disposal of properties are
applied as a reduction of cost without recognition of a gain or loss
except where such disposals would result in a major change in the
depletion rate.
Capitalized costs are depleted and depreciated using the
unit-of-production method based on the estimated gross proven oil and
natural gas reserves before royalties as determined by independent
engineers. Units of natural gas are converted into barrels of
equivalents on a relative energy content basis.
Capitalized costs, net of accumulated depletion and depreciation, are
limited to estimated future net revenues from proven reserves, based
on year-end prices, undiscounted, less estimated future abandonment
and site restoration costs, general and administrative expenses,
financing costs and income taxes.
Estimated future abandonment and site restoration costs are provided
for over the life of proven reserves on a unit-of-production basis.
The annual charge is included in depletion and depreciation expense
and actual abandonment and site restoration costs are charged to the
provision as incurred. The amounts recorded for depletion and
depreciation and the provision for future abandonment and site
restoration costs are based on estimates of proven reserves and future
costs. The recoverable value of capital assets is based on a number of
factors including the estimated proven reserves and future costs. By
their nature, these estimates are subject to measurement uncertainty
and the impact on financial statements of future periods could be
material.
(b) Income taxes
The Company follows the liability method of accounting for future
income taxes. Under the liability method, future income tax assets and
liabilities are determined based on "temporary differences"
(differences between the accounting basis and the tax basis of the
assets and liabilities) and are measured using the currently enacted,
or substantially enacted, tax rates and laws expected to apply when
these differences reverse. A valuation allowance is recorded against
any future income tax assets if it is more likely than not that the
asset will not be realized. Income tax expense or benefit is the sum
of the Company's provision for current income taxes and the difference
between the opening and ending balances of the future income tax
assets and liabilities.
(c) Financial instruments
(i) Fair value of financial instruments:
The Company's financial instruments consist of cash, accounts
receivable, bank indebtedness, accounts payable, accrued
liabilities and preferred shares. The fair values of all of the
Company's financial instruments approximate their carrying
values.
(ii) Foreign currency exchange risk:
The Company is exposed to foreign currency fluctuations as
crude oil and natural gas prices received are referenced to
U.S. dollar denominated prices.
(iii) Credit risk:
A substantial portion of the Company's accounts receivable are
with customers and joint venture partners in the oil and gas
industry and are subject to normal industry credit risks.
Purchasers of the Company's natural gas, crude oil and natural
gas liquids are subject to an internal credit review to
minimize the risk of non-payment.
(d) Estimates and assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, and the disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results
could differ from those estimates.
18 ENTERRA ENERGY CORP. 2001 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2001 and 2000
(e) Change in accounting policy
The Company has changed its method of accounting for petroleum and
natural gas properties from the "successful efforts" method to the
"full cost" method, as set out in note 2(a).
Prior to this change of policy, the Company followed the "successful
efforts" method whereby the costs to acquire proven and unproven
properties and costs to drill development wells and successful
exploratory wells were capitalized. Costs of unsuccessful exploratory
wells, geological and geophysical activities and lease rentals were
expensed. The carrying value of the petroleum and natural gas
properties was assessed periodically on a property-by-property basis
by comparing the discounted future cash flow and the carrying amount
of the petroleum and natural gas properties. When assets were sold,
retired or otherwise disposed of, the applicable costs and accumulated
depletion and depreciation were removed from the accounts and the
resulting gain or loss was recognized.
The "full cost" method has been adopted retroactively and prior
financial statements have been restated. The impact of these changes
on the December 31, 2000 and 1999 consolidated financial statements
was as follows:
2000 1999
---------- ----------
BALANCE SHEET:
Capital assets, decrease $ 532,276 $ 726,449
Future income tax liability, decrease 225,539 297,793
Retained earnings, decrease 306,737 428,656
STATEMENTS OF OPERATIONS AND CASH FLOWS:
Operating costs, decrease -- 2,655
Depletion, depreciation and site restoration, decrease 1,532,730 136,600
Gain on sale of oil and gas properties, decrease 1,338,557 91,402
Future income taxes, increase 72,254 --
Future income tax recovery, decrease -- 246,884
Net earnings (loss), increase 121,919 (199,031)
Funds from operations, increase -- 2,655
---------- ----------
Earnings (loss) per share, increase 0.03 (0.08)
Funds from operations per share, increase -- --
---------- ----------
The effect of this change on the December 31, 2001 consolidated
financial statements is not significant.
(f) Per share amounts
The Canadian Institute of Chartered Accountants has approved a new
standard for the computation, presentation and disclosure of per share
amounts. The Corporation has retroactively adopted the new standard.
The new standard has been applied retroactively with no effect on
prior period per share calculations. Under the new standard, the
treasury stock method is used instead of the imputed earnings method
to determine the dilutive effect of stock options and other dilutive
instruments. Under the treasury stock method, only "in the money"
dilutive instruments impact the diluted calculations.
The weighted average number of common shares outstanding during the
years ended December 31, 2001 and 2000 were 6,992,393 and 4,421,844,
respectively. In computing diluted earnings per share 5,114 shares
(2000 - 6,849 shares and 1999 - nil shares) were added to the weighted
average number of common shares outstanding during the year as a
result of the dilutive effect of stock options. No adjustments were
required to reported earnings or funds from operations in computing
diluted per share amounts.
(g) Stock-based compensation
The Company has a stock option plan which is described in note 8. No
compensation expense is recognized for this plan when stock options
are issued to employees. Any consideration paid by employees on
exercise of stock is credited to share capital. If stock or stock
options are repurchased from employees, the excess of consideration
paid over the carrying amount of the stock or stock option cancelled
is charged to contributed surplus.
(h) Comparative figures
The presentation of certain figures of the previous year has been
changed to conform with the presentation adopted for the current year.
(i) Revenue recognition
Revenue from the sale of oil and gas is recognized based on volumes
delivered to customers at contractual delivery points and rates. The
costs associated with the delivery, including operating and
maintenance costs, transportation and production based royalty
expenses are recognized in the same period in which the related
revenue is earned and recorded.
ENTERRA ENERGY CORP. 2001 ANNUAL REPORT 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2001 and 2000
3. BUSINESS COMBINATION
Effective August 1, 2001 Enterra acquired 100% of the issued and
outstanding shares of Big Horn Resources Ltd. Details of the acquisition
are as follows:
Assets acquired:
Current assets, excluding cash $ 2,841,106
Property and equipment 46,874,349
-----------
49,715,455
Liabilities assumed:
Current liabilities 2,428,687
Bank indebtedness 8,950,000
Provision for future abandonment and site restoration costs 280,274
Future income tax liability 11,309,464
-----------
22,968,425
Net non-cash assets acquired 26,747,030
Cash acquired 37,599
-----------
$26,784,629
===========
Consideration:
Cash $ 2,227,647
Preferred shares (7,418,336 issued) 6,305,586
Common shares (3,496,436 issued) 18,251,396
-----------
$26,784,629
===========
The consideration value attributed to the common shares contemplates an
element related to the former stock options of Big Horn that were exchanged
for stock options of the Company. However, this element was not considered
significant for separate reporting.
4. PROPERTY AND EQUIPMENT
December 31, 2001
-----------------------------------------------
ACCUMULATED
DEPLETION AND
COST DEPRECIATION NET
------------ ------------- ------------
Petroleum and natural gas properties $ 82,574,219 $ 9,939,258 $ 72,634,961
Office furniture and equipment 843,464 338,928 504,536
------------ ------------ ------------
$ 83,417,683 $ 10,278,186 $ 73,139,497
============ ============ ============
December 31, 2000
-----------------------------------------------
ACCUMULATED
DEPLETION AND
COST DEPRECIATION NET
------------ ------------- ------------
Petroleum and natural gas properties $ 21,858,219 $ 3,638,387 $ 18,219,832
Office furniture and equipment 156,295 40,653 115,642
------------ ------------ ------------
$ 22,014,514 $ 3,679,040 $ 18,335,474
============ ============ ============
In conducting its ceiling test evaluation the Company followed generally
accepted accounting principles which provide for a two-year exemption from
write-down where the purchase price of reserves had been determined on a
basis which provided a higher amount than the ceiling test value, and where
the excess was not considered to represent a permanent impairment in the
ultimate recoverable amount. If the two-year exemption had not been used,
the Company would have taken a write-down of $8.1 million based on prices
at December 31, 2001 of $22.05 per bbl of oil and $3.42 per mcf of gas.
Enterra qualified for the exemption in connection of its acquisition of Big
Horn in August 2001.
At December 31, 2001 costs of undeveloped land of $8,053,000 (2000 -
$60,253) were excluded from the calculation of depletion expense.
20 ENTERRA ENERGY CORP. 2001 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2001 and 2000
5. INVESTMENTS
Investments in Red Raven Resources Inc. and Raptor Capital Corporation were
disposed of during 2001 as part of the severance amounts paid to former
directors and officers of the Company.
6. BANK INDEBTEDNESS
Bank indebtedness represents the outstanding balance under a line of credit
of $21,500,000 with the Alberta Treasury Branches. Drawings bear interest
at 0.25% above the bank's prime lending rate. Security is provided by a
first charge over all of the Company's assets. The balance is repayable on
demand.
While the loan is due on demand, the company is not subject to scheduled
repayments. The lender has advised the Company that, subject to annual
review of the borrowing base and the Company continuing to comply with the
terms of the loan agreement, no payments will be required in 2002.
7. INCOME TAXES
The income tax provision is calculated by applying Canadian federal and
provincial statutory tax rates to pretax income with adjustments as set out
in the following table:
2001 2000 1999
----------- ----------- -----------
Earnings before income taxes $ 2,299,055 $ 4,175,178 $ (248,558)
----------- ----------- -----------
Combined federal and provincial income tax rate 42.6% 44.6% 44.6%
----------- ----------- -----------
Computed income tax provision 979,397 1,862,964 (110,857)
Increase (decrease) resulting from:
Resource allowance (1,211,828) (942,523) (72,470)
Non-deductible Crown royalties, net of ARTC 781,332 864,085 74,796
Capital loss carryforward not previously recognized -- -- (100,395)
Non-taxable portion of capital gain -- -- (17,848)
Capital taxes 120,000 -- --
Other 13,099 (62,467) 1,243
Change in valuation allowance -- -- 225,531
----------- ----------- -----------
$ 682,000 $ 1,722,059 $ --
=========== =========== ===========
The components of the net future income tax liability at December 31, 2001
were as follows:
Future income tax assets:
Share issue costs $ 916,709
Future abandonment and site restoration 239,973
Deferred gain 243,236
-----------
1,399,918
Future income tax liabilities:
Property, plant and equipment 12,559,019
-----------
Net future income tax liability $11,159,101
===========
At December 31, 2001 the Company had approximately $43,152,000 (2000 -
$17,001,000) of tax pools available to reduce future taxable income.
ENTERRA ENERGY CORP. 2001 ANNUAL REPORT 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2001 and 2000
8. SHARE CAPITAL
(a) Authorized:
Unlimited number of voting common shares without nominal or par
value.
Unlimited number of preferred shares issuable in one or
more series.
(b) Issued:
NUMBER OF
COMMON SHARES AMOUNT
------------- ------------
Balance, December 31, 1999 4,042,639 $ 3,512,830
Issued on exercise of options 402,500 415,000
Issued on conversion of warrants 150,000 1,104,016
--------- ------------
Balance, December 31, 2000 4,595,139 5,031,846
Issued for cash on exercise of options 43,500 99,450
Issued for cash pursuant to public offerings 1,035,000 7,081,024
Issued on acquisition of property and equipment 213,047 1,300,000
Issued on acquisition of Big Horn Resources Ltd. 3,496,436 18,251,396
Shares repurchased (232,500) (753,300)
Issue costs incurred, net of income tax benefit of $1,118,251 -- (1,442,153)
--------- ------------
Balance, December 31, 2001 9,150,622 $ 29,568,263
========= ============
(c) Options:
WEIGHTED-
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE
--------- --------------
Outstanding at January 1, 2000 260,000 $ 1.00
Options granted 573,000 $ 4.60
Options exercised (402,500) $ 1.03
-------- --------
Outstanding at December 31, 2000 430,500 $ 5.76
Options granted 990,000 $ 4.41
Options exercised (43,500) $ 2.29
Options cancelled (577,000) $ 6.15
-------- --------
Outstanding at December 31, 2001 800,000 $ 4.00
-------- --------
Options exercisable at December 31, 2001 174,223 $ 4.00
======== ========
There were 800,000 options outstanding at December 31, 2001. These
options are exercisable at $4.00 and expire on November 2, 2005.
(d) Warrants:
WEIGHTED
NUMBER OF AVERAGE
WARRANTS PRICE
--------- ---------
Balance, December 31, 1999 302,000 CDN$ 2.50
Issued pursuant to bridge financing 150,000 US$ 4.00
Expired during year (302,000)
Converted to common shares (150,000)
--------- ---------
Balance, December 31, 2000 --
Issued pursuant to public offering 1,000,000 US$ 3.50
Issued pursuant to underwriters agreement 100,000 US$ 5.40
--------- ---------
Balance, December 31, 2001 1,100,000 US$ 3.67
========= =========
On January 17, 2001, the Company completed a public offering in the
United States. The offering consisted of 1,000,000 units of one common
share and one share purchase warrant for US$4.55 per unit. The share
purchase warrants are exercisable until April 17, 2002 at US$3.50 per
share. The 100,000 share purchase warrants related to the underwriters
agreement are exercisable at US$5.40 per share starting January 16,
2002 and may be exercised for a four year period thereafter. See note
12(c).
22 ENTERRA ENERGY CORP. 2001 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2001 and 2000
9. SERIES 1 PREFERRED SHARES:
At December 31, 2001 there were 7,418,336 Series 1 preferred shares
outstanding. These shares are nonvoting. They are transferable.
Holders of these shares are not entitled to receive any dividends
until the first anniversary of the date of issue, which was August 16,
2001. Subsequent to August 16, 2002 holders of these shares are
entitled to receive a fixed cumulative dividend of $0.085 per share
per annum, payable quarterly. These shares are redeemable at any time
by the Company for $0.85 per share. Holders of these shares may
require the Company to redeem all or any of these shares, at $0.85 per
share, at any time following August 16, 2002. There is no market for
these shares and none is expected to develop. See note 12(a).
10. FINANCIAL INSTRUMENTS
Effective January 31, 2001, the Company settled a fixed price contract
eliminating the requirement to deliver set physical quantities of oil
at fixed prices. Upon the cancellation of the contract the Company
received approximately $1,680,000, which will be recognized over the
term of the contract. At December 31, 2001 the remaining deferred gain
related to this settlement was $761,302.
11. COMMITMENTS
The Company entered into a zero cost collar arrangement during 2001
which provides a floor price of US$20 per barrel and a ceiling price
of US$24 per barrel for 500 barrels of oil per day. The contract is
effective from November 1, 2001 through April 30, 2002.
12. SUBSEQUENT EVENTS
(a) On March 26, 2002 the Company purchased 6,123,870 of its Series 1
preferred shares for $2.3 million, resulting in a gain on redemption
of $2,905,290.
(b) On March 28, 2002 the Company agreed to issue 400,000 warrants to an
arm's length U.S.-based consulting firm in connection with a potential
debt financing in the United States. The warrants are to have a
two-year term and are subject to different pricing (100,000 warrants
at US$2.60, 100,000 at US$3.30 and 200,000 at US$4.00). The US$2.60
warrants are to vest upon the execution of a nonbinding letter of
intent relating to the proposed financing. The US$3.30 and US$4.00
warrants are to vest only on the successful closing and funding of the
proposed financing.
(C) On April 12, 2002 the Company was granted a 30-day extension for the
1,000,000 share purchase warrants which were exercisable until April
17, 2002. The expiry date was extended to May 17, 2002.
13. UNITED STATES ACCOUNTING PRINCIPLES AND REPORTING
The Company's consolidated financial statements have been prepared in
Canadian Dollars and in accordance with generally accepted accounting
principles in Canada ("Canadian GAAP"), which differ in some respects
from those in the United States ("U.S. GAAP"). Any differences in
accounting principles as they pertain to the accompanying consolidated
financial statements were insignificant except as described below:
(a) Property and equipment:
The Company performs a cost recovery ceiling test which limits net
capitalized costs to the undiscounted estimated future net revenue
from proven oil and gas reserves plus the cost of unproven properties
less impairment, using year-end prices or average prices in that year,
if appropriate. In addition, the value is further limited by including
financing costs, administration expenses, future abandonment and site
restoration costs and income taxes. Under U.S. GAAP, companies using
the "full cost" method of accounting for oil and gas producing
activities perform a ceiling test using discounted estimated future
net revenue from proven oil and gas reserves using a discount factor
of 10%. Prices used in the U.S. GAAP ceiling tests performed for this
reconciliation were those in effect at the applicable year-end.
Financing and administration costs are excluded from the calculation
under U.S. GAAP. At December 31, 2001 the Company would have realized
a U.S. GAAP ceiling test write-down of $17.5 million (after tax).
(b) Provision for future abandonment and site restoration:
Under U.S. GAAP, the provision for future abandonment and site
restoration costs is recorded as a reduction of property and
equipment.
(C) Investments:
Under U.S. GAAP, the Company's investments would be classified as
"Available-For-Sale" in accordance with definitions per SFAS 117 and
the securities be recorded at fair market value. Unrealized gains and
losses net of related income taxes are included in comprehensive
income and reported as a separate component of shareholders' equity.
(d) Long-term debt:
U.S. GAAP requires that demand loans be classified as a current
liability unless the Company intends to refinance on a long-term basis
and the intent is supported by the ability to refinance. At December
31, 2000, the Company had supported its ability to refinance this
demand facility.
ENTERRA ENERGY CORP. 2001 ANNUAL REPORT 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2001 and 2000
(e) Financial instruments:
Effective January 1, 2001, the Company adopted, for U.S. GAAP, the
provisions of SFAS 133 which established new accounting and reporting
standards for derivative instruments and for hedging activities. This
statement requires an entity to establish, at the inception of a
hedge, the method it will use for assessing the effectiveness of the
hedging derivative and the measurement approach for determining the
ineffective aspect of the hedge. Those methods must be consistent with
the entity's approach to managing risk. At December 31, 2001, under
Canadian GAAP, the Company had a deferred gain resulting from the
settlement of a fixed price contract, which is being amortized over
the term of the contract. Under U.S. GAAP, this gain, net of related
income taxes, would be included in income as it did not qualify for
hedge accounting under SFAS 133.
(f) Comprehensive income:
Under U.S. GAAP, SFAS 130 requires the reporting of comprehensive
income in addition to net earnings. Comprehensive income includes net
income plus other comprehensive income; specifically, all changes in
equity of a company during a period arising from non-owner sources.
(g) Stock-based compensation:
Under U.S. GAAP, SFAS 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans as
well as transactions in which an entity issues its equity instruments
to acquire goods or services from non-employees. During 2001, the
Company granted 119,500 stock options to non-employees. Had
compensation cost for these stock options been determined based on
their fair market value at the grant dates of the awards, the
Company's pre-tax income for the year would have decreased by $90,294.
The weighted average fair market value of options granted to
non-employees in 2001 was $0.76 per option. The fair value of each
option granted was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
risk-free interest rate of 5%, volatility of 30% and expected life of
five years. During 2001, all of the options outstanding were repriced.
As all options were "out of the money" at December 31, 2001, no
compensation expense would have been recorded under U.S. GAAP.
(h) Balance sheets:
The adjustments using U.S. GAAP would result in the following changes
to the consolidated balance sheets of the Company:
2001 2000
------------------------------- -------------------------------
CANADIAN U.S. CANADIAN U.S.
GAAP GAAP GAAP GAAP
------------ ------------ ------------ ------------
(restated) (restated)
Assets
Current assets $ 6,923,061 $ 6,923,061 $ 2,506,439 $ 2,506,439
Capital assets (a)(b) 73,139,497 43,692,704 18,335,474 18,084,627
Investments (c) -- -- 422,000 647,000
Deferred share issue costs -- -- 837,555 837,555
------------ ------------ ------------ ------------
$ 80,062,558 $ 50,615,765 $ 22,101,468 $ 22,075,621
============ ============ ============ ============
Liabilities
Current liabilities (d) $ 9,152,492 $ 27,651,690 $ 5,671,120 $ 5,671,120
Long-term debt (d) 18,408,904 -- 8,403,000 8,403,000
Future income taxes (a,c,e,g) 11,159,101 285,850 405,888 456,063
Provision for future site restoration (b) 751,088 -- 250,847 --
Deferred gain (e) 761,302 -- -- --
Series 1 preferred shares 6,305,586 6,305,586 -- --
============ ============ ============ ============
46,538,473 34,243,126 14,730,855 14,530,183
Shareholders' equity:
Share capital 29,568,263 29,568,263 5,031,846 5,077,359
Comprehensive income (c, f) -- -- -- 174,825
Retained earnings (deficit) 3,955,822 (13,195,624) 2,338,767 2,293,254
------------ ------------ ------------ ------------
33,524,085 16,372,639 7,370,613 7,545,438
------------ ------------ ------------ ------------
$ 80,062,558 $ 50,615,765 $ 22,101,468 $ 22,075,621
============ ============ ============ ============
24 ENTERRA ENERGY CORP. 2001 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2001 and 2000
(i) Income statements:
The adjustments using U.S. GAAP would result in the following changes
to the consolidated financial statements of the Company:
2001 2000 1999
------------ ------------ ------------
(restated) (restated)
Net earnings (loss) under Canadian GAAP $ 1,617,055 $ 2,453,119 $ (248,558)
Adjustments:
Full cost accounting (a) (28,695,705) -- --
Related income taxes 11,159,101 -- --
Hedging gain (e) 761,302 -- --
Related income taxes (324,315) -- --
Stock-based compensation (g) (90,294) -- --
Related income taxes 38,465 -- --
------------ ------------ ------------
Net earnings (loss) under U.S. GAAP (15,534,391) 2,453,119 (248,558)
Other comprehensive income:
Unrealized (realized) gain on investments, net of income tax effect (c) -- 174,825 (79,842)
------------ ------------ ------------
Comprehensive income (loss) $(15,534,391) $ 2,627,944 $ (328,400)
============ ============ ============
Earnings (loss) per share:
Basic $ (2.22) $ 0.53 $ (0.13)
Diluted $ (2.22) $ 0.52 $ (0.13)
============ ============ ============
ENTERRA ENERGY CORP. 2001 ANNUAL REPORT 25
MESSAGE FROM THE CHAIRMAN
There has been a great deal of discussion recently about financial disclosure
and accounting principles, especially in light of the collapse of Enron Corp.
and the resulting shockwaves it sent throughout the accounting profession.
(PHOTO OF JOHN P. McGRAIN)
The Board of Directors of Enterra is committed to the concept of full and fair
disclosure of all of the Company's operations, assets and liabilities. This is
especially important for our shareholders because Enterra, being a small
company, does not have the benefit of multiple research coverage from various
brokerage houses. By and large, our shareholders are not large institutional
investors which generally have a better grasp of the various accounting
principles governing the presentation and disclosure of our Company's earnings
and cash flow.
As your chairman there are several ways I evaluate Enterra's progress and report
that progress to you. I believe that the critical component to any oil and gas
company's success is its cash flow. Without strong cash flows Enterra cannot
sustain and expand its production from year to year.
While GAAP earnings are important as a factor in evaluating Enterra's growth, I
apply a stronger focus on the Company's cash flow behavior because I believe it
is more representative of the Company's performance. While GAAP earnings are an
important component of our reported results, I believe that cash flow is a
better measure of performance because it is unaffected by one-time gains or
losses from the sale of an asset or by non-cash expenses like depletion.
Both GAAP numbers and cash numbers are necessary in order to get a complete
picture of the Company's financial results. It is my view that cash flow is a
more representative measure of our success. I believe that the market has
accepted this view and that our shareholders, along with analysts and other
stakeholders, support the reporting of cash earnings along with GAAP earnings.
Our stock's performance is usually rated more as a multiple of cash flow than
earnings.
Our cash flow growth since 1998, as shown in the chart below, is a good
barometer of our growth. We fully expect to continue this pattern in the years
to come.
/s/ John P. McGrain
John, P. McGrain
Chairman
(CASH FLOWS CHART)
26 ENTERRA ENERGY CORP. 2001 ANNUAL REPORT
CORPORATE INFORMATION
HEAD OFFICE
2600, 500 - 4th Ave. S.W.
Calgary, AB T2P 2V6
Tel (403) 263-0262
Fax (403) 294-1197
www.enterraenergy.com
AUDITORS
KPMG LLP
Chartered Accountants
Calgary, AB
SOLICITORS
Donahue & Partners
Calgary, AB
BANKERS
Alberta Treasury Branches
Calgary, AB
TRANSFER AGENT
Olympia Trust Company
Calgary, AB
STOCK EXCHANGE LISTINGS
Nasdaq (symbol: EENC)
TSX Venture (symbol: ENT)
ABBREVIATIONS
bopd barrels of oil per day
mcf/day thousands of cubic feet per day
boe/day barrels of oil equivalent per day (6 mcf equivalent to 1 bbl)
boe barrels of oil equivalent (6 mcf equivalent to 1 bbl)
mboe thousands of barrels of oil equivalent
mmcf/day millions of cubic feet per day
DIRECTORS
Walter A. Dawson*
Reg J. Greenslade
H.S. (Scobey) Hartley*
Thomas J. Jacobsen
John P. McGrain*
OFFICERS
John P. McGrain
Chairman
Reg J. Greenslade
President and Chief Executive Officer
Thomas J. Jacobsen
Chief Operating Officer
Luc Chartrand, C.A.
Chief Financial Officer
Trevor Spagrud
Vice President Operations
Don Almond
Vice President Production
Rick McHardy
Corporate Secretary
*Member, Audit Committee
ANNUAL GENERAL MEETING
THE ANNUAL GENERAL MEETING OF THE SHAREHOLDERS WILL BE HELD ON FRIDAY JUNE 7,
2002 AT 10:00 AM AT THE 400 CLUB, 710 - 4TH AVENUE S.W., CALGARY, ALBERTA.
SHAREHOLDERS ARE ENCOURAGED TO ATTEND AND THOSE UNABLE TO DO SO ARE REQUESTED TO
COMPLETE AND RETURN THE PROXY FORM TO THE COMPANY'S REGISTRAR AND TRANSFER
AGENT, OLYMPIA TRUST COMPANY.
ENTERRA ENERGY CORP.
HEAD OFFICE
2600, 500 - 4th Ave. S.W.
Calgary, AB T2P 2V6
Tel (403) 263-0262
Fax (403) 294-1197
www.enterraenergy.com
AUDITORS' REPORT
To the Shareholders
We have audited the consolidated balance sheets of Enterra Energy Corp. as at
December 31, 2001 and 2000 and the consolidated statements of earnings and
retained earnings and cash flows for the years then ended. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards and auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 2001
and 2000 and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles.
We also audited the adjustments described in note 2(e) to the consolidated
financial statements that were applied to restate the consolidated financial
statements for the year ended December 31, 1999. In our opinion, such
adjustments are appropriate and have been properly applied. The 1999 financial
statements, prior to such adjustments, were audited by other auditors who
expressed an opinion without reservation on these statements in their report
dated March 31, 2000.
Canadian generally accepted accounting principles vary in certain significant
respects from accounting principles generally accepted in the United States.
Application of accounting principles generally accepted in the United States
would have affected results of operations for each of the years in the
three-year period ended December 31, 2001 and shareholders' equity as at
December 31, 2001 and 2000 to the extent summarized in note 13 to the
consolidated financial statements.
(Signed) KPMG LLP
Chartered Accountants
Calgary, Canada
March 6, 2002, except as to note 12,
which is as of April 12, 2002
AUDITORS' REPORT
To the Shareholders
We have audited the consolidated balance sheets of Enterra Energy Corp. as at
December 31, 2001 and 2000 and the consolidated statements of earnings and
retained earnings and cash flows for the years then ended. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards and auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 2001
and 2000 and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles.
We also audited the adjustments described in note 2(e) to the consolidated
financial statements that were applied to restate the consolidated financial
statements for the year ended December 31, 1999. In our opinion, such
adjustments are appropriate and have been properly applied.
Canadian generally accepted accounting principles vary in certain significant
respects from accounting principles generally accepted in the United States.
Application of accounting principles generally accepted in the United States
would have affected results of operations for each of the years in the
three-year period ended December 31, 2001 and shareholders' equity as at
December 31, 2001 and 2000 to the extent summarized in note 13 to the
consolidated financial statements.
(Signed) KPMG LLP
Chartered Accountants
Calgary, Canada
March 6, 2002, except as to note 12,
which is as of April 12, 2002
[LETTERHEAD - COLLINS BARROWS]
COLLINS BARROW CALGARY LLP
1400 First Alberta Place
777 - 8th Avenue S.W.
Calgary, Alberta, Canada
T2P 3R5
T. 403. 298.1500
F. 403. 298.5814
email: calgary@collinsbarrow.com
AUDITORS' REPORT
--------------------------------------------------------------------------------
To the Shareholders
Westlinks Resources Ltd.
(now Enterra Energy Corp.)
We have audited the consolidated balance sheets of WestLinks Resources Ltd. (now
Enterra Energy Corp.) as at December 31, 1999 and 1998 and the consolidated
statements of income (loss) and retained earnings and cash flows for the years
then ended. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We performed our audit of the consolidated financial statements under the
successful efforts basis of accounting for property and equipment. We have not
audited the adjustments described in note 2(e) to the consolidated financial
statements to restate the consolidated financial statements from successful
efforts to the full cost basis of accounting for property and equipment.
In our opinion, except for the adjustments to restate the accounting basis from
successful efforts to full cost, these consolidated financial statements present
fairly, in all material respects, the financial position of the company as at
December 31, 1999 and 1998 and the results of its operations and its cash flows
for the years then ended.
/s/ Collins Barrow Calgary LLP
CHARTERED ACCOUNTANTS
Calgary, Alberta
March 31, 2000