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Net earnings increased to $87.7 million in 2012 compared to $81.4 million in 2011, which was mostly due to a significant increase in production volumes, which was partially offset by higher royalties and income taxes and increases in operating costs, depletion and depreciation expense, general and administrative expenses and finance costs. The increase in finance costs is due to the issuance of the convertible debentures in February 2012, whereas the other increased costs were the result of increased activity due to the Company's growth through the acquisitions completed in 2012, along with the first full year of operations at West Bakr.
BUSINESS ENVIRONMENT
The Company's financial results are significantly influenced by fluctuations in commodity prices, including price differentials. The following table shows select market benchmark prices and foreign exchange rates:
2012 2011--------------------------------------------------------------------------------------------------------------------------------------------------------Dated Brent average oil price ($/Bbl) 111.56 111.27U.S./Canadian Dollar average exchange rate 0.9994 0.9918--------------------------------------------------------------------------------------------------------------------------------------------------------
The average price of Dated Brent oil was relatively unchanged in 2012 compared with 2011. All of the Company's production is priced based on Dated Brent and shared with the respective governments through PSCs. When the price of oil increases, it takes fewer barrels to recover costs (cost recovery barrels) which are assigned 100% to the Company. The contracts provide for cost recovery per quarter up to a maximum percentage of total revenue. If the eligible cost recovery is less than the maximum defined cost recovery, the difference is defined as "excess". In Egypt, the Contractor's share of excess ranges between 0% and 30% depending on the contract. In Yemen, the excess is treated as production sharing oil. If the eligible cost recovery exceeds the maximum allowed percentage, the unclaimed cost recovery is carried forward to the next quarter. Typically maximum cost recovery or cost oil ranges from 25% to 30% in Egypt and 50% to 60% in Yemen. The balance of the production after maximum cost recovery is shared with the respective governments (production sharing oil). Depending on the contract, the government receives 70% to 86% of the production sharing oil or profit oil. Production sharing splits are set in each contract for the life of the contract. Typically the government's share of production sharing oil increases when production exceeds pre-set production levels in the respective contracts. During times of increased oil prices, the Company receives less cost oil and may receive more production sharing oil. For reporting purposes, the Company records the respective government's share of production as royalties and taxes (all taxes are paid out of the Government's share of production).
During the political change in Egypt, business processes and operations have generally proceeded as normal. The Company continues to expand its footprint in Egypt as evidenced by the closing of recent business acquisitions. While exploration and development activities have generally been uninterrupted, the Company has continued to experience delays in the collection of accounts receivable from the Egyptian Government due to the economic impact caused by the instability in the country. The Company is in continual discussions with the Egyptian Government to determine solutions to the delayed cash collections, and expects to recover the accounts receivable balance in full. The Company collected $157.0 million in accounts receivable from the Egyptian Government during 2012, including $76.1 million in the fourth quarter.
SELECTED QUARTERLY FINANCIAL INFORMATION 2012----------------------------------------------------------------------------($000s, except per share,price and volume amounts) Q-4 Q-3 Q-2 Q-1--------------------------------------------------------------------------------------------------------------------------------------------------------Average sales volumes (Bopd) 19,148 17,124 16,978 16,720Average price ($/Bbl) 98.70 96.88 95.84 104.78Oil sales 173,864 152,624 148,078 159,426Oil sales, net of royalties 92,281 74,540 73,633 77,212Cash flow from operating activities 65,250 2,368 24,603 1,771Funds flow from operations(i) 46,839 35,397 35,174 36,088Funds flow from operations per share - Basic 0.63 0.49 0.48 0.49 - Diluted 0.57 0.47 0.43 0.48Net earnings 34,836 11,774 30,149 10,975Net earnings - diluted 32,156 11,774 20,821 10,975Net earnings per share - Basic 0.48 0.16 0.41 0.15 - Diluted 0.39 0.16 0.25 0.15Total assets 653,425 635,529 620,937 648,012Cash and cash equivalents 82,974 45,732 72,230 127,313Convertible debentures 98,742 102,920 95,043 105,835Total long-term debt, including current portion 16,885 31,878 37,855 57,910Debt-to-funds flow ratio(ii) 0.8 1.0 1.0 1.2--------------------------------------------------------------------------------------------------------------------------------------------------------SELECTED QUARTERLY FINANCIAL INFORMATION 2011----------------------------------------------------------------------------($000s, except per share,price and volume amounts) Q-4 Q-3 Q-2 Q-1--------------------------------------------------------------------------------------------------------------------------------------------------------Average sales volumes (Bopd) 12,054 13,406 11,826 11,218Average price ($/Bbl) 99.12 104.00 105.57 97.06Oil sales 109,919 128,265 113,615 97,995Oil sales, net of royalties 60,609 71,769 62,513 52,863Cash flow from operating activities 2,330 3,456 54,354 3,490Funds flow from operations(i) 26,469 37,980 30,597 24,930Funds flow from operations per share - Basic 0.36 0.52 0.42 0.35 - Diluted 0.35 0.51 0.40 0.34Net earnings 30,519 26,110 21,874 2,889Net earnings - diluted 30,519 26,110 21,874 2,889Net earnings per share - Basic 0.42 0.36 0.30 0.04 - Diluted 0.41 0.35 0.29 0.04Total assets 525,806 465,262 420,956 404,184Cash and cash equivalents 43,884 105,007 122,659 86,353Convertible debentures - - - -Total long-term debt, including current portion 57,609 57,303 56,998 56,731Debt-to-funds flow ratio(ii) 0.5 0.5 0.6 0.7--------------------------------------------------------------------------------------------------------------------------------------------------------(i) Funds flow from operations is a measure that represents cash generated from operating activities before changes in non-cash working capital and may not be comparable to measures used by other companies.(ii) Debt-to-funds flow ratio is measure that represents total long-term debt (including the current portion) plus convertible debentures over funds flow from operations from the trailing 12 months and may not be comparable to measures used by other companies.
