Canadian Spirit Resources Inc.
TSX VENTURE : SPI
OTC Bulletin Board : CSPUF

Canadian Spirit Resources Inc.

November 30, 2011 06:00 ET

Canadian Spirit Resources Inc. Announces Third Quarter 2011 Financial Results

CALGARY, ALBERTA--(Marketwire - Nov. 30, 2011) - Canadian Spirit Resources Inc. ("CSRI" or the "Corporation") (TSX VENTURE:SPI) (OTCBB:CSPUF) announces the release of its interim financial results and Management Discussion and Analysis ("MD&A") for the three and nine month periods ended September 30, 2011.

The financial data presented herein is in accordance with International Financial Reporting Standards ("IFRS") and all amounts are presented in Canadian dollars, unless otherwise indicated. The unaudited interim financial statements for the three and nine months ended September 30, 2011 include certain reconciliations between the previously used Canadian Generally Accepted Accounting Principles ("previous GAAP") and IFRS.

This news release summarizes information contained in the unaudited interim financial statements and MD&A for the three and nine month periods ended September 30, 2011 and should not be considered a substitute for reading these documents, which are available on SEDAR at www.sedar.com or the Corporation's website at www.csri.ca, for full disclosure.

CSRI is a natural resources company focusing on the identification and development of opportunities in the unconventional gas sector of the energy industry.

HIGHLIGHTS

  • Natural gas sales for the nine months total $1.1 million
  • $12 million of capital expenditures in the third quarter
  • 2 new wells on production - c-45-I (mid-September) and c-B18-I (early October)
  • Williston Reservoir Water Pipeline Project to be completed by year-end
  • Non-brokered private placement of up to 4,000,000 units at $0.85 per unit expected to close on or about December 7, 2011 (see News Release dated November 18, 2011)
FINANCIAL AND OPERATIONAL REVIEW
Selected Financial Information
For the nine month periods ended or as at September 30 2011 2010
Gross natural gas sales, before royalties $ 1,088,593 $ -
Operating netbacks, after royalty credits applied $ 535,793 $ -
Net loss and comprehensive loss (after income taxes) $ (2,324,386 ) $ (1,586,469 )
Loss per share (basic & diluted) $ (0.03 ) $ (0.03 )
Net working capital $ 1,962,692 $ 8,061,428
Total assets $ 80,060,887 $ 57,895,668
Shareholders' capital $ 72,603,878 $ 51,858,585
Common shares outstanding 73,792,361 57,820,161
Net capital expenditures $ 15,291,028 $ 9,165,464

Revenue and Royalties

Total gross revenue from the sale of natural gas for the three and nine months ended September 30, 2011 was $332,017 and $1,088,593 respectively. The four wells tied into the Farrell Creek Montney Gas Facility as at September 30, 3011 (the c-45-I well was tied-in in mid-September 2011) are all deep horizontal wells and as such, each of these producing wells qualifies for the British Columbia Government's Deep Royalty Credit Program. This Program will generate up to $2.5 million in royalty credits for each well and the royalty credits will be drawn down over time as the wells produce natural gas. At current rates of production, the Corporation should not have to actually remit any crown royalties to the British Columbia Government for the next two to three years.

Production
Three months ended September 30, Nine months ended September 30,
2011 2010 2011 2010
Total production of natural gas (Mcf) 101,964 - 321,920 -
Average production of natural gas
Mcf/d 1,110 - 1,355 -
boe/d 185 - 226 -
Average sales price of natural gas
$/Mcf $ 3.25 $ - $ 3.41 $ -
$/boe $ 19.52 $ - $ 20.45 $ -
BC Spectra Station 2 Benchmark price (1)
$/Mcf $ 3.26 N/A $ 3.42 N/A
Note:
(1) Source: NGX Natural Gas Exchange website (converted from $/GJ)

In January 2011, the Farrell Creek Montney Gas Plant commenced operations with natural gas currently being sold on a spot basis at BC Station 2 on the Spectra Energy pipeline system. Production averaged 1,110 Mcf/d (185 boe/d) and 1,355 Mcf/d (226 boe/d) during the three and nine months ended September 30, 2011 respectively, with the Corporation realizing an average price of $3.25 per Mcf ($19.52 per boe) and $3.41 per Mcf ($20.45 per boe) respectively. In the fourth quarter 2011, production levels are expected to double over the prior quarter due to the tie-in of the c-B18-I well in early October 2011.

Operating Netbacks
For the three month period ended September 30, 2011 $ % $/Mcf $/boe
Natural gas sales $ 332,017 $ 3.25 $ 19.52
Royalties 25,798 -7.8 % 0.25 1.52
Net revenue 357,815 3.50 21.04
Royalty credits applied (25,939 ) (0.25 ) (1.53 )
Operating and production costs (160,939 ) (1.58 ) (9.49 )
Transportation costs (29,393 ) (0.29 ) (1.73 )
Operating netbacks $ 141,544 $ 1.38 $ 8.25

For the nine month period ended September 30, 2011 $ % $/Mcf $/boe
Natural gas sales $ 1,088,593 $ 3.41 $ 20.45
Royalties (99,554 ) 9.1 % (0.31 ) (1.86 )
Net revenue 989,039 3.10 18.59
Royalty credits applied 95,041 0.30 1.77
Operating and production costs (507,928 ) (1.58 ) (9.47 )
Transportation costs (40,359 ) (0.13 ) (0.75 )
Operating netbacks $ 535,793 $ 1.69 $ 10.14

After royalties, operating costs and transportation, operating netbacks were $1.38 per Mcf ($8.25 per boe) and $1.69 per Mcf ($10.14 per boe) for the three and nine months ended September 30, 2011 respectively.

During the nine months ended September 30, 2011, the Corporation applied $95,041 of royalty credits against crown royalties that would otherwise have been payable. The royalty credits applied are accounted for as an offset against the capital cost accumulated within Property, Plant and Equipment. The difference between royalty expense and royalty credits applied for the nine months ended September 30, 2011 of $4,513 represent actual crown royalties paid in relation to the sale of natural gas liquids. In the third quarter 2011, adjustments to prior period crown royalty calculations received from the Corporation's joint venture partner resulted in a recovery of royalty expense of $25,798 and a corresponding decrease of royalty credits applied. The operating netback results for the nine months ended September 30, 2011 are therefore now considered normalized for the period.

General and Administrative Expenses
Three months ended September 30, Nine months ended September 30,
2011 2010 2011 2010
Consulting fees $ 57,752 $ 28,304 $ 165,424 $ 90,125
Salaries and benefits 297,030 260,956 892,459 832,715
Other general administration 215,361 195,270 715,355 535,770
570,143 484,530 1,773,238 1,458,610
Capitalized and other costs (112,817 ) (122,447 ) (359,504 ) (354,113 )
457,326 362,083 1,413,734 1,104,497
Stock-based compensation 68,955 101,861 569,958 649,188
Capitalized portion of stock-based compensation (21,523 ) (31,488 ) (130,276 ) (178,736 )
47,432 70,373 439,682 470,452
$ 504,758 $ 432,456 $ 1,853,416 $ 1,574,949

In 2011 the Corporation continued consulting contracts with an investment advisor, a land consultant, a computer network maintenance company and an external IFRS consulting firm. During the first nine months of 2011, the Corporation also entered into consulting arrangements with a staffing recruitment firm and an executive compensation firm, resulting in an increase of 83.5% in consulting fees, before capitalization, from $90,125 for the first three quarters of 2010 to $165,425 for the first three quarters of 2011. Consulting fees for the third quarter 2011 increased compared to the third quarter 2010 due to additional investment advisory consulting services.

Salaries and benefits, before capitalization, of $892,459 for the nine months ended September 30, 2011 increased by 7.2% compared with 2010 ($832,715) due to general annual salary increases and the hiring of an additional employee in March 2011, but offset by efficiencies gained in the Corporation's group health benefits plan.

The increase in other general administration expenses for the nine months ended September 30, 2011 was mainly attributable to increased professional fees. Professional fees for the first nine months of 2011 are comprised of legal counsel fees for joint venture matters, audit related fees for the three 2011 quarterly interim financial statement reviews, reservoir engineer fees for the March 31, 2011 Reserve Report, and 2011 annual audit and reservoir engineer reserve report fees which were not accrued for in the first nine months of 2010.

During the nine months ended September 30, 2011, the Corporation capitalized a total of $358,904 (2010: $352,313) of general and administration expenses, including salaries and benefits, directly related to exploration and development activities. These amounts are included as part of either Exploration and Evaluation assets or Property, Plant and Equipment as recorded by the Corporation. Other costs capitalized during the nine months ended September 30, 2011 of $600 (2010: $1,800) relate to consulting fees incurred as equity instruments issue costs, and are recorded by the Corporation as a reduction of shareholders' capital. For the nine months ended September 30, 2011 the Corporation also capitalized $130,276 (2010: $178,736) of share-based compensation expense for those employees of the Corporation directly involved in exploration and development activities.

Due to a reduced level of stock options granted as well as a decrease in the market price of the Corporation's shares, share-based compensation, after capitalization, decreased by 6.5% to $439,682 for the nine months ended September 30, 2011, from $470,452 for the comparative prior period.

Capital Expenditures, Liquidity and Capital Resources

The Corporation's gross capital expenditures on natural gas operations for the three and nine months ended September 30, 2011 and 2010 are detailed in the following table:

Three months ended September 30, Nine months ended September 30,
2011 2010 2011 2010
Lease acquisitions and retentions $ 8,627 $ 249,411 $ 1,587,066 $ 4,031,648
Geological and geophysical - 3,112 - 3,112
Net expenditure on drilling, completion and facilities costs 11,827,002 3,884,168 15,232,808 4,592,169
Capitalized overhead 243,093 153,335 489,180 531,049
Total natural gas expenditures $ 12,078,722 $ 4,290,026 $ 17,309,054 $ 9,157,978

The Corporation's capital budget is reviewed and approved by the Board of Directors on a quarterly basis. The Corporation's Board of Directors has approved a total capital expenditure budget for 2011 of $16.2 million (net), including an estimated $0.5 million for capitalized overhead. CSRI has budgeted for $1.6 million (net) of capital expenditures for the fourth quarter 2011, of which $1.0 million was already included in accounts payable as at September 30, 2011 due to a cash call related to the Williston Reservoir Water Pipeline Project.

For the nine months ended September 30, 2011, net capital expenditures, including land acquisitions and after British Columbia government incentive Summer Drilling and Deep Royalty Credits earned of $2.0 million, totaled $15.3 million (2010: $9.2 million) compared to a budgeted capital expenditure of $14.6 million (2010: $9.3 million). The capital expenditures in excess of budget for the nine months ended September 30, 2011 were a result of unexpected cost overruns from the Corporation's joint venture partner relating to the completion of the c-45-I and c-B18-I wells and the construction of the Williston Reservoir Water Pipeline Project.

Cash administration expenses (general and administrative expenses excluding share-based compensation) for 2011 are expected to total $2.4 million (2010: $2.1 million), before capitalization of exploration and development related overhead. Revenue from interest on cash balances has been budgeted at $0.2 million for the 2011 year. The Corporation has budgeted for operating netbacks from the Farrell Creek Montney operations of $1.5 million during 2011, which may not be fully achieved due to continued weak natural gas prices.

At September 30, 2011, the Corporation had a net working capital balance of $2.0 million, consisting of cash in the amount of $6.6 million, term deposits of $1.3 million, accounts receivable and prepaids of $0.2 million less accounts payable and other accrued liabilities of $6.1 million. The accounts payable and other accrued liabilities balance at September 30, 2011 relates primarily to horizontal drilling and completion activity at c-45-I and c-B18-I in the Montney Project at Farrell Creek as well as the costs related to the Williston Reservoir Water Pipeline Project in conjunction with the Corporation's joint venture partner.

On November 18, 2011 CSRI announced a non-brokered private placement of up to 4,000,000 units (the "Units") at a price of $0.85 per Unit. Each Unit will consist of one common share of the Corporation and one half of one share purchase warrant (the "Warrants"). Each whole Warrant will entitle the holder to purchase an additional common share of the Corporation for a period of two years at an exercise price of $1.10 per common share. The private placement is expected to close on or about December 7, 2011, but there is no certainty that the private placement will be fully subscribed.

INTERNATIONAL FINANCIAL REPORTING STANDARDS

In February 2008, the Accounting Standards Board of the Canadian Institute of Chartered Accountants confirmed that IFRS would replace previous GAAP commencing in 2011 for profit-oriented Canadian publicly accountable enterprises effective January 1, 2011. As such, the Corporation has reported its third quarter 2011 results and 2010 comparative information in accordance with IFRS. The adoption of IFRS has not had a material impact on the Corporation's operations.

Information regarding CSRI is available on SEDAR at www.sedar.com or the Corporation's website at www.csri.ca.

On behalf of the Board of Directors,

CANADIAN SPIRIT RESOURCES INC.

Don Gardner, Chief Executive Officer & Secretary

The corporate information contained in this news release may contain forward-looking forecast information. The reader is cautioned that assumptions used in the preparation of such information, although considered reasonably accurate by CSRI at the time of preparation, may prove to be incorrect. The actual results achieved during the forecast period will vary from the information provided herein and the variations may be material. Consequently there is no representation by CSRI that actual results achieved during the forecast period will be the same in whole or in part as those forecast.

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