Net earnings increased to $24.9 million in Q1-2013 compared to $11.0 million in Q1-2012, which was mostly due to decreased finance costs combined with the positive effect of the change in unrealized gain/loss on convertible debentures. The decrease in finance costs is due to the issue costs for convertible debentures that were incurred in Q1-2012 for which there is no corresponding expense in Q1-2013. The earnings effect of increased sales volumes and decreased royalties were offset by reduced prices and increased operating costs.
BUSINESS ENVIRONMENT
The Company's financial results are influenced by fluctuations in commodity prices, including price differentials. The following table shows select market benchmark prices and foreign exchange rates:
2013 2012---------------------------------------------------------------------------- Q-1 Q-4 Q-3 Q-2 Q-1----------------------------------------------------------------------------Dated Brent average oil price ($/Bbl) 112.59 109.97 109.61 108.19 118.49U.S./Canadian Dollar average exchange rate 1.009 0.991 0.995 1.006 1.001--------------------------------------------------------------------------------------------------------------------------------------------------------
The average price of Dated Brent oil was relatively unchanged in 2013 compared with 2012. 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. During the first quarter of 2013, the Company collected $75.2 million in accounts receivable from the Egyptian Government.
