News Column

Palliser Oil & Gas Corporation Reports Q2 2014 Financial and Operating Results and Updates Maha Transaction

August 28, 2014

ENP Newswire - 28 August 2014

Release date- 27082014 - Calgary, Alberta - Palliser Oil & Gas Corporation (TSX VENTURE: PXL) wishes to report financial and operating results for the three and six months ended June 30, 2014.

Certain selected financial and operational information is set out below and should be read in conjunction with Palliser's financial statements complete with the notes to the financial statements and related MD&A which is expected to be available at and the Company's website at on Tuesday, August 26, 2014.

Q2 2014 Highlights

Decrease in average quarterly production. Second quarter 2014 production averaged 1,739 boe/d, a decrease of 37% from the second quarter of 2013, and a decrease of 7% from 1,874 boe/d in the first quarter of 2014;

Increased operating costs. Production, operating, and transportation expenses averaged $31.38/boe in the second quarter of 2014, 37% higher than $22.95/boe in the second quarter of 2013. Production, operating, and transportation expenses decreased by 25% from $41.85 in the first quarter of 2014;

Decreased operating netbacks. Operating netbacks averaged $15.88/boe, 49% lower than the prior year comparative quarter. Operating netbacks improved by 259% compared to $4.42/boe in the first quarter of 2014;

Decreased funds flow from operating activities. Funds flow from operating activities was $1.1 million ($0.02/share), compared to funds flow from operating activities of $6.1 million ($0.10/share) in the prior year comparative quarter. Funds flow from operating activities in the second quarter is an improvement from negative funds flow from operating activities of $0.7 million in the first quarter of 2014;

Executed a $0.9 million capital program. The second quarter capital program included 1.0 reactivation and capital workovers;

Maintained a significant undeveloped heavy oil land position. The Company's undeveloped heavy oil land position at the end of the second quarter was 34,116 net acres and

Maintained a significant prospect inventory. The Company's heavy oil prospect inventory stands at 169 locations, 83 of which are included in the 2013 independent reserves report and 86 locations that are not included in the reserves report.


Operationally, the second quarter of 2014 was another very quiet period for Palliser, with capital expenditures constrained, due to the Company's limited financial flexibility. Production averaged 1,739 boe/d, a seven per cent decline from the first quarter 2014 production average of 1,874 boe/d. Palliser recorded positive funds flow from operating activities of $1.1 million in the quarter.

The second quarter saw stronger heavy oil pricing, with Palliser realizing an average crude oil price of $84.00/bbl for its heavy oil sales. However, the Company incurred hedging losses in the amount of $2.4 million that negatively impacted funds flow from operating activities. Both production, operating, and transportation expenses and general and administrative ('G&A') expenses were reduced in the second quarter compared to the first quarter.

Initiatives to reduce operating costs, which were undertaken in the first half of 2014, are starting to be reflected in lower overall operating costs, and G&A expenses are being reduced. The Company is applying all available funds to reducing its indebtedness.

Capital expenditures totaled $0.9 million in Q2, a 77% reduction as compared to the comparative period in 2013. Capital expenditures included capital workovers, capitalized G&A expenses, and one (1.0 net) heavy oil well reactivation that is forecast to be brought on production in the third quarter.

Financial and Outlook

At June 30, 2014 the Company had a working capital deficiency (net debt) totaling $49.3 million (excluding financial derivatives). The Company is not in compliance with a covenant under its bank loan. The Company is required to maintain a current ratio (current assets adjusted to include the undrawn credit facility balance) of not less than 1.0:1.0. As at June 30, 2014 and at today's date the Company was not in compliance with the current lending ratio banking covenant.

On July 29, 2014, Palliser and its lender entered into a Loan Amending and Extension Forbearance Agreement, wherein the lender, subject to certain conditions, extended the Company's credit facilities to October 31, 2014 to allow the proposed transaction with Maha Energy Inc. ('Maha') to proceed. The Company does not anticipate generating sufficient funds flow from operating activities in the upcoming year to fund its working capital deficiency.

In the second quarter management identified impairment triggers relating to both its Greater Lloydminster and Medicine Hat cash generating units ('CGUs'). The impairment triggers identified included significant and prolonged production declines, increases in operating costs, decreases in operating netbacks and market transactions including the agreements entered into by the Company with Maha subsequent to June 30, 2014.

As a result, management conducted impairment tests for its Greater Lloydminster and Medicine Hat CGUs and recognized an impairment totaling $19.0 million in the second quarter based on management's estimate of the fair value less costs to sell of the respective CGUs. Fair value less costs to sell was based on overall recent market activity including the transactions entered into by the Company with Maha subsequent to June 30, 2014.

On July 30, 2014, Palliser closed the sale of a 50% working interest in part of its Manitou, Saskatchewan assets to Maha for $2.15 million (approximately $1.9 million after interim adjustments) ('Manitou Sale').

The production associated with the Manitou Sale was then approximately 125 bbl/d. In addition, Palliser has signed two farmout agreements with Maha for a capital program that will be undertaken at no cost to Palliser, with the exception that surface equipment for all of the wells will be supplied from Palliser's inventory of surplus equipment.

At Manitou, one (0.3 net before payout & 0.5 net after payout) well has been drilled and cased and is expected to be completed for heavy oil production in early September. At Marwayne, Alberta, four (2.8 net) wells are forecast to be reactivated in August and September.

In a farmout with a third party at Neilburg, Saskatchewan, two (1.15 net) wells are expected to be drilled by the end of September, with the wells expected to be on production early in the fourth quarter. Palliser will remain operator of the wells subject to the Manitou Sale and all of the wells to be drilled and re-activated in the Maha and third party capital program.

With limited capital spending to date in 2014, production from the second quarter is expected to continue to decline in to the third quarter. Production growth from a seven well (4.25 net) capital program in the third quarter is expected to reverse that trend with a net production increase in to the fourth quarter.

Proposed Amalgamation - Update to the July 30, 2014, News Release On July 30, 2014, Palliser and Maha, a private company incorporated in Alberta, announced that they had entered into amalgamation agreement (the 'Amalgamation Agreement'), pursuant to which Maha and Palliser will carry out the Amalgamation to form an oil and gas company focused on exploitation and development to be called 'Maha Energy Inc.'.

Since July 30, 2014, the TSXV has determined to treat the proposed Amalgamation, which is an 'Arm's Length Transaction', as a 'Reverse Takeover' (as such terms are defined in the TSXV Corporate Finance Manual). As a result, Palliser is required to disseminate additional information on the Amalgamation in accordance with section 3.4 of TSXV Corporate Finance Manual Policy 5.2.

Based on audited management prepared financial statements for the year ended December 31, 2013, prepared on June 18, 2014, Maha had revenue of US$Nil, expenses of US$1,108,641, and a net loss of US$1,108,641 for the 2013 fiscal year. In addition, as at December 31, 2013, Maha had working capital of $978,379, assets of US$4,552,950 and liabilities of US$656,736.

Based on unaudited management prepared financial statements for the six month period ended June 30, 2014, prepared on August 15, 2014, Maha had revenue of US$Nil, operating expenses of US$Nil, and a net loss of US$599,212. In addition, as at June 30, 2014, Maha had working capital of US$8,121,340, assets of US$18,393,566 and liabilities of US$451,601.

As announced in the July 30, 2014 news release, completion of the Amalgamation is subject to the condition that Maha must complete bond and/or equity financings for combined aggregate gross proceeds equalling not less than US$70 million (the 'Financings'), prior to October 31, 2014. Stockholm Corporate Finance AB, a Sweden-based investment banking organization, has agreed to assist Maha in a proposed equity financing equalling US$15 million (the 'Equity Financing'), which will form the equity component of the Financings.

Stockholm Corporate Finance will be paid a cash commission equal to 5.75% of the gross proceeds raised under the Equity Financing, as well as a monthly advisory fee payable in cash. The particulars of the bond financing have not been established to date, however, the bond financing is expected to be completed in the Nordic market. Maha has also engaged Hartco Financial Inc. ('Hartco') to provide financial advisory and other services to Maha in connection with the Amalgamation and related transactions.

Pursuant to the terms of the engagement agreement entered into between Maha and Hartco, Hartco will receive an aggregate of US$48,000 in cash and 552,000 Maha Shares (as defined below) to be issued upon of the successful completion of the Amalgamation.

Pursuant to the Amalgamation, shareholders of Palliser will receive 0.1393 of a common share of New Maha (a 'New Maha Share') for each common share of Palliser (a 'Palliser Share'). The deemed value of the Amalgamation to Palliser Shareholders is equal to approximately $0.19 per Palliser Share, based upon the arm's length pricing of recent equity issuances by Maha at US$1.25 per Maha Share, the July 30, 2014 Bank of Canada noon US$/C$ exchange rate of 1.0909 and the corresponding 0.1393 exchange ratio.

Shareholders of Maha will receive one New Maha Share for each common share of Maha (a 'Maha Share'), the aggregate deemed consideration for the Maha Shares will be US$45,439,130.

Based on the 63,915,979 Palliser Shares issued and outstanding as of the date hereof and the 598,612 Palliser Shares issuable pursuant to outstanding Palliser share unit awards that will vest upon the completing of the Amalgamation, the holders of Palliser Shares will receive 8,986,883 New Maha Shares.

Based on the 35,799,304 Maha Shares issued and outstanding as of the date hereof and the 552,000 Maha Shares issuable to Hartco for financial advisory and other services provided in connection with the Amalgamation and related transactions, Maha Shareholders will receive 36,351,304 New Maha Shares.

Assuming Maha completes the Equity Financing of 10,000,000 Maha Shares at an issue price of US$1.50 per Maha Share, an aggregate of 55,338,187 New Maha Shares will be issued and outstanding with the Maha Shareholders and Palliser Shareholders anticipated to own, on a non-diluted basis, approximately 46,351,304 (84%) and 8,986,883 (16%) of the outstanding New Maha Shares, respectively.

Annual & Special Shareholders Meeting

The Palliser annual and special shareholders' meeting is scheduled to take place on October 7, 2014. Closing of the Amalgamation is expected to occur shortly thereafter, but in any event on or before October 31, 2014. The Notice of Annual and Special Meeting and a Joint Information Circular for the Annual and Special Meeting of the Shareholders of Palliser, with respect to the annual business of Palliser and the proposed Amalgamation of Palliser and Maha are expected to be mailed to shareholders in mid-September.


Palliser Oil & Gas Corporation

Kevin J. Gibson

President & CEO

Tel: (403) 209-5717


Ivan J. Condic

Vice President

Tel: (403) 209-5718


About Palliser

Palliser is a Calgary-based junior oil and gas company focused on high netback heavy oil production in the greater Lloydminster area of Alberta and Saskatchewan.


Completion of the transaction is subject to a number of conditions, including TSXV acceptance and shareholder approval. The Amalgamation transaction cannot close until the required shareholder approval is obtained. There can be no assurance that the transaction will be completed as proposed or at all.

Forward-Looking Statements

Statements in this document may contain forward-looking information including matters related to the strategic review. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect.

Events or circumstances may cause actual results to differ materially from those predicted, as a result of numerous known and unknown risks, uncertainties, and other factors, many of which are beyond the control of the Company. These risks include, but are not limited to: the risks associated with the oil and gas industry; commodity prices, and exchange rate changes.

Industry related risks could include, but are not limited to: operational risks in exploration; proposed dispositions not being completed or if completed, not providing the benefits expected; development and production; delays or changes in plans; risks associated to the uncertainty of reserve estimates; health and safety risks, and the uncertainty of estimates and projections of production, costs and expenses.

In addition, forward-looking statements or information are based on a number of factors and assumptions which have been used to develop such statements and information but which may prove to be incorrect. Although the Company believes that the expectations reflected in such forward-looking statements or information are reasonable, undue reliance should not be placed on forward-looking statements because the Company can give no assurance that such expectations will prove to be correct.

In addition to other factors and assumptions which may be identified herein, assumptions have been made regarding, among other things: the ability of the Company to obtain financing on acceptable terms; the impact of increasing competition; the general stability of the economic and political environment in which the Company operates; the timely receipt of any required regulatory approvals; the ability of the Company to obtain qualified staff, equipment and services in a timely and cost efficient manner; drilling results; the ability of the operator of the projects which the Company has an interest in to operate the field in a safe, efficient and effective manner; field production rates and decline rates; the ability to replace and expand reserves through acquisition, development and exploration; the timing and costs of pipeline, storage and facility construction and expansion and the ability of the Company to secure adequate product transportation; future commodity prices; currency, exchange and interest rates; the regulatory framework regarding royalties, taxes and environmental matters in the jurisdictions in which the Company operates and the ability of the Company to successfully market its oil and natural gas products.

Readers are cautioned that the foregoing lists of factors and assumptions are not exhaustive. Additional information on these and other factors that could affect the Company's operations and financial results are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (, at the Company's website (

Furthermore, the forward-looking statements contained in this news release are made as at the date of this news release and the Company does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.


The Company has adopted the industry standard of 6:1 Mcf to Bbl when converting natural gas to barrels of oil equivalent. Disclosure provided herein in respect of Boes may be misleading, particularly if used in isolation. A Boe conversion ratio of 6 Mcf:1 Bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6 Mcf:1 Bbl, utilizing a conversion ratio of 6:1 may be misleading as an indication of value.

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Source: ENP Newswire

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