2010 ANNUAL REPORT130 ADELAIDE STREET WEST, SUITE 1010TORONTO, ONTARIO, CANADA M5H 3P5T + 416.368.9137F + 416.364.5400E INFO@CANDAX.COM
Candax Energy Inc. (“Candax”) Corporate Information is a Canadian independent, international oil and gas exploration, development and production company. The Company’s primary objective is to increase shareholder value by building a sustainable, international upstream company focused on opportunities in Africa and the Middle East. DIRECTORS AND OFFICERS EXECUTIVE HEAD OFFICE BANKING Benoit Debray Dr. Richard J. H. Norris INDEPENDENT ENGINEERS M’hamed Ali Bouleyman 130 Adelaide Street West, Suite 1010 Bank of Montreal TUNISIA OFFICE Chairman Toronto, Ontario, Canada M5H 3P5 Main Branch – 1 First Canadian Place T + 416.368.9137 100 King Street West F + 416.364.5400 Toronto, Ontario, Canada M5X 1A3 Stephen Drinkwater President, CEO and Director E email@example.com LEGAL COUNSEL Ryder Scott Company Christopher O. Irwin Director and Chairman, Ecumed Petroleum Ecumed Petroleum 1200, 530 - 8th Avenue SW Rue du Lac Windermere Calgary, Alberta, Canada T2P 3S8 MADAGASCAR OFFICE Thomas Rebilly Les Berges du Lac Director 1053 Tunis, Tunisia T + 216.71.962.611 McCarthy Tétrault LLP Matthieu Milandri F + 216.71.963.765 Box 48, Suite 5300 Director Toronto Dominion Bank Tower Toronto, Ontario, Canada M5K 1E6 Pascal Mirville Director Candax Madagascar Ltd T + 416.362.1812 Immeuble SANTA F + 416.868.0673 Lot III - 3è Etage Chief Financial Officer Antanimena McGrigors INVESTOR RELATIONS Charlotte M. May Antananarivo 101 5 Old Bailey TRANSFER AGENT Madagascar London EC4M 7BA Chief Operating Officer and T + 2220.127.116.115.58 DX 227 London Chancery Lane BOARD SUB-COMMITTEE General Manager, Tunisian Operations F + 218.104.22.1685.81 Tel: +44 (0)207 054 2500 Ecumed Petroleum MEMBERSHIP Fax: +44 (0)207 054 2501 Corporate Secretary CHF Investor Relations AUDITORS 90 Adelaide Street West, 6th Floor Equity Financial Trust Company Toronto, Ontario, Canada M5H 3V9 200 University Avenue, Suite 400 TSX: CAX T + 416.868.1079 Toronto, Ontario, Canada M5H 4H1 F + 416.868.6198 T + 416.361.0152 Audit Committee F + 416.361.0470 Mhamed Ali Bouleymen – Chairman ANNUAL & SPECIAL MEETING E: firstname.lastname@example.org Benoit Debray Christopher O. Irwin PricewaterhouseCoopers LLP Royal Trust Tower, TD Centre TABLE OF CONTENTS Compensation Committee 77 King Street West www.candax.com 1 Achievements from 2010 and Objectives for 2011 Benoit Debray Suite 3000, PO Box 82 2 Message to Our Shareholders Stephen Drinkwater Toronto, Ontario, Canada M5K 1G8 4 Report on Operations Thomas Rebilly Tuesday, June 28 at 10 am at the 8 Board of Directors Corporation’s head office. 9 Management’s Discussion and Analysis Governance Committee 130 Adelaide Street West, Suite 1010 23 Forward-Looking Statements Christopher O. Irwin – Chairman Toronto, Ontario, Canada M5H 3P5 24 Management’s Responsibility for Financial Reporting Benoit Debray 25 Independent Auditor’s Report Stephen Drinkwater Print date: May 24, 2011 26 Consolidated Balance Sheets Thomas Rebilly 27 Consolidated Statements of Operations and Deficit 28 Consolidated Statements of Cash Flows Disclosure Committee 29 Consolidated Statements of Comprehensive Loss Benoit Debray – Chairman 30 Notes to the Consolidated Financial Statements 41 Corporate Information Charlotte M. May Matthieu Milandri Dr. Richard J. H. NorrisNew Logo IntroductionCandax is clearly a company reborn with a clean image and a new management team. The logo incorporates theindustrys universal colours for oil and gas of green and red with the flocks of green and red colour representingboth production and share growth. A bold and custom typeface was created to communicate a sense of confidenceand stability and ultimately represent the new image of Candax.
Achievements from 2010 Restructured balance sheet, significantly reducing the debt burden. Successfully re-connected the El Bibane 3 well and restarted production in September 2010. The Ulysse drilling rig arrived and the Ezzaouia work-over and side- track program was mostly completed. Objectives for 2011 Obtained a one-year extension to the Madagascar Block 1101 exploration permit and progressed Environmental Impact Assessments and a drilling permit. With minor exceptions, the objectives for 2011, in terms of field operationsDELIVERING are discretionary and will be completed and/or accelerated where possible, depending on the finances available to Candax.ON OUR • Work-over Robbana-1 well, with data acquisition and restart production • Reprocess existing seismic on all properties in Tunisia – Robbana, El Bibane and Ezzaouia in priorityOBJECTIVES • Acquisition of 3D on El Bibane and on Robbana – subject to proof of need from reprocessed existing data • Complete full-field numerical simulation study of El Bibane to optimize subsequent exploitation of the field • Integration of the new seismic data/interpretations • Development of an optimised field exploitation plan – for execution in 2012 • Progress planning of a full-field enhanced oil recovery plan, based on water-flooding, for Robbana • Implementation of the initial stages of this plan in the fourth quarter, with the drilling of an injector-producer pair • Complete the required works on Block 1101 Madagasacar to move into the second exploration period and potentially farm-down Candax’s Participating Interest in the block 1 • Ensure adequate financing flexibility in the short and medium term to enable these capital programs candax energy inc. annual report 2010
At the time of last year’s annual report, Candax was facing challenges on many fronts. Today, it is very gratifying to note that, although challenges remain, very significant progress has been made and we have a clear road map for growth. To Our Shareholders DELIVERING IS A PROCESS Benoit Debray Dr. Richard J. H. Norris Chairman President, CEO and Director It is a great pleasure that we are writing this letter one year into our stewardship of Candax. At the time of last year’s annual report, Candax was facing challenges on many fronts. Today, it is very gratifying to note that, although challenges remain, very significant progress has been turn-around was made possible thanks to the efforts made and we have a clear road map for growth. of Candax’s management and board and crucially the support and belief of Candax’s new major shareholder, 2010 was a year of major changes and upheaval for Candax. namely Geofinance. At the beginning of 2010, Candax board and management were working intensively to resolve the liquidity issues which At the time of writing last year’s letter to shareholders, resulted in investment by Geofinance N.V. and a significant production was at an all time low, with El Bibane remaining change in the board and executive management. By the off-line despite a light work-over in March 2010, a long end of 2010, Candax had negotiated a reduction of its debt delayed work-over and side-track campaign was set to burden by half, and notably, negotiated a two year grace commence on the Ezzaouia field and the Robbana field period for repayments, an essential time frame that was shut-in. By the end of 2010 production albeit limited provides Candax with the ability to properly evaluate was successfully restored to El Bibane and quality upside and bring its assets back into production. Such a radical had been quantified in non-producing assets. 2candax energy inc. annual report 2010
We aim to increase production from across the range of assets – producing, shut-in, non-producing and indeed exploration. This will not happen overnight, but we are dedicated to delivering by implementing best oil field technology and practices.In May 2010 the long awaited Ulysses rig arrived in Tunisiagoing directly to the Ezzaouia Field and work commenced onthe delayed drilling and work-over campaign. This campaignhad mixed results with the Ezzaouia 5 well side-trackencountering unexpectedly depleted levels in the Zeebag anddisappointing work-overs on the Ezzaouia 1, Ezzaouia 11 andEzzaouia 9 wells. Although further work is required to optimizeproduction from these wells, initial results are promising. Asof the writing of this letter, we are also pleased to report thatthe Ezzaouia 2 side-track has shown positive indications fromopen hole logging and is being readied for production.On the El Bibane field, the El Bibane 3 well was worked-overin August 2010 and despite finding the tubing to be broken inmore than one place, production was restored via a new tubingstring anchored above the irretrievable broken tubing andpacker. At the time of the work-over, the field had been located onshore a stepwise approach to investmentoff line for just over a year, and at start-up, it was clear can be applied, with initial wells adding data (as wellthat production levels seen before the tubing broke in August as production), with an iterative approach to optimizing2009, were unlikely to be resumed immediately. By year end, the overall development.production still required artificial lift, with no sign of the well 2011 will also be focused on significant amounts of dataresuming natural flow as the gas-cap had recompressed acquisition and field studies. Although we would want toduring the shut-in period. see the results soonest, it is important to recognize that theOn the main non-producing assets, Chaal and Madagascar process will take up most of the year and we are unlikely towere much in focus as well as former producers Al Manzah see any direct activity to increasing production on El Bibaneand Belli and our highly prospective Deep Triassic target. After until 2012. Ezzaouia is also the subject of on-going studies,having worked hard to find and close a farm-in deal on the and we anticipate that these will bear fruit both in 2011Chaal discovery, it was a major disappointment to have the via individual well optimizations and in 2012 by additionalpermit annulled when it expired in May 2010. At Madagascar, infill wells.the first major milestone was achieved in obtaining a year’s We aim to increase production from across the range ofextension to the exploration permit in June. Subsequent to assets – producing, shut-in, non-producing and indeedthis, we progressed the necessary logistical and environmental exploration. This will not happen overnight, but we areworks necessary as preparation for completing the agreed dedicated to delivering by implementing best oil fieldwork program in 2011. Candax firmly believes that the shut-in technology and practices.Belli and Al Manzah fields have potential, and we are workingactively to maximize our opportunities to drill the high-impact In closing, we want to take this opportunity to thank allDeep Triassic prospect that underlies the El Bibane and our staff at Candax, Ecumed and in Madagascar for theirEzzaouia fields. commitment in seeing Candax through the challenges of 2010. And, we also thank you, our shareholders, for yourCandax has a well balanced portfolio of assets comprising confidence and patience as we work on delivering theboth exploration and production assets, however our focus production needed to restore Candax to profit and toin 2010 was on delivering near-term production. We believe re-establish your E&P company.firmly in the upside potential of Candax’s exploration assets,but we do not take our eyes off the bottom line – productionand revenues are necessary to underpin exploration spend inan E&P company. Benoit DebrayDelivering on the strength provided by the corporate Chairmanrestructuring, Candax will be progressing multiple vectors forgrowth in 2011. Foremost is the development of Robbana. Thefield is proven to have significant volumes of oil in place, and 3to-date a very low recovery factor due to a lack of energy in thereservoir. Energy can be added by water-injection and although Dr. Richard J. H. Norrisit is too early to predict the likely recoveries, Robbana hasexcellent potential and is likely to be a key driver in Candax’s President, CEO and Directorshort, medium and long term growth. Having just one well inthe field underscores the difficulty of characterizing the fieldand the likely response to water-flooding, however being candax energy inc. annual report 2010
Report on Operations Robbana A restructured balance sheet and a strong supportive shareholder give Candax the platform and time necessary to fully deliver the promise of the Candax assets. Robbana – with significant oil in place the development of Robbana takes front and centre position. DELIVERING ON OUR PROPERTIES Robbana takes front and centre position. The field has produced small volumes from one well over a 17 year period. Our initial analysis of the data has been subsequently confirmed by Petroleum Insights Sàrl (“Petroleum Insights”), Sucker-rod pump "Nodding Donkey" on Robbana-1 well. an independent oil and gas consulting firm with the assistance of Denver-based MHA Petroleum Consultants LLC. Based on their analysis of pressure response data from the field during its 17 years of production history as well as on volumetric calculations, Petroleum Insights has calculated a range of 18 to 25 million barrels of oil in place. Petroleum Insights has also forecast 4.3 to 5.8 million barrels of recoverable oil for 100% of the field. These figures are based on a numerical full field simulation study assuming enhanced recovery through conventional water-flooding. Subsequently, pressure data from the well has indicated that the connected volumes are at or slightly above the high end of this range. Based on Petroleum Insight’s positive evaluation, Candax is in the process of designing a water-flooding and development well program to increase recovery from the field and to enable categorization of all or part of these preliminary figures as proven and probable reserves under NI 51-101 standards. It is Early time oil-saturation map of five wells anticipated that this work will start in the second half of 2011, with the drilling (three injectors, two producers) from full field simulation model. of at least one new well on the Robbana structure. Prior to drilling, reprocessing of the existing 2D seismic data will be done, and if necessary there will be an acquisition of 3D data. The first step is to resume production, however modest, from the Robbana-1 well in the second quarter of 2011. 4candax energy inc. annual report 2010
El Bibane EzzaouiaAfter a year of beingoff-line, El Bibane 3production wasrestarted inSeptember 2010. The El Bibane 3 well, which had gone off-line in August 2009 with a broken tubing string was worked-over in August 2010 using the Ensco 85 jack-up rig. Despite finding the tubing to be broken in more than one place, production was restored via a new tubing string anchored above the irretrievable broken tubing and packer. At this stage, the field had essentially been off line for just over a year, and at start-up, it was clear that the production levels seen before the tubing broke in August 2009 were unlikely to resume immediately. By year end, production still required artificial lift, with no sign of the well resuming natural flow. It appears that the gas-cap had recompressed during the shut-in period. It is increasingly clear that the El Bibane field has robust remaining reserves. However, it is less clear how these can be extracted with the existing infrastructure. Given the under-performance of the two redevelopment wells, studies were initiated to better understand the behaviour of the El Bibane 3 well and the El Bibane field. This full-field numerical simulation will reconcile all data, history match the production data and provide scenario planning for the extraction of the remaining reserves. In parallel the existing seismic will be reprocessed and if deemed necessary new 3D seismic will be shot over the field in 2011.The Ecumed operations team at theonshore Zarzis Central Processing Facilitywhich handles production from El Bibaneand Robbana. A multi-well work-over and side-track program was performed by Initial oil saturations in oil-rim from full- Ezzaouia’s operator Maretap in 2010, continued into 2011. The initial field simulation model of El Bibane. Ezzaouia is a mature field, with significant results of the program were mixed, with the Ezzaouia-5 side-track encountering a swept zone. On the other hand, the work-overs have remaining reserves – accessible through managed to successfully rectify various mechanical issues. The full patient and careful analysis. In collaboration potential of these work-overs has not yet been realized as the wells with our partners, studies are progressing require delicate pump optimization subsequent to the mechanical work-overs. These optimized production rates coupled with the the future of this venerable field. finalization of the Ezzaouia-2 side-track in 2011 will restore robust production levels to the Ezzaouia field. In parallel to the field operations, analysis of the Ezzaouia 3D seismic data has highlighted that improvements could be achieved by reprocessing. This work is ongoing and is expected to provide significant impetus for further infill well opportunities. 5After waiting 16 months, the Ulysse Rigarrived in the second quarter 2010 andperformed two side-tracks and three work-overs on the Ezzaouia field. candax energy inc. annual report 2010
Belli and Al Manzah Belli and Al Manzah are non-producing fields. It is Candax’s firm belief that there is residual oil to be produced from both permits. Notwithstanding that our early focus has been on Robbana, El Bibane and Ezzaouia, the technical data on Belli and Al Manzah has been thoroughly reviewed. Belli has potential simply from re-segregation of the reservoir fluids during its 13 year shut in period. Moreover there is considerable upside potential in the possibility of the highly prolific fracture network being recharged via spontaneous imbibitions from the porous matrix. Beyond this, the tight but porous matrix provides an additional target for the future. The Boudabous formation was producing 250 bopd when shut in (due to poor economics) in 1998 – we are confident that a sidetrack on Belli 1 would provide profitable production in today’s economic climate. Candax has initiated studies with ETAP via the jointly managed operator Maretap to progress this. Likewise Al Manzah was shut-in (subsequent to an unsuccessful work over) Belli and Al Manzah but has potential for small, but economically viable production. Al Manzah has significant potential in deeper, undrilled formations that produce locally have good potential on other permits. for the redevelopment of the shut-in reservoirs, as well as exciting additional potential in unexploited levels. Al Manzah operation prior to 2007 shut-in. The Belli field site. 6candax energy inc. annual report 2010
MadagascarCandax’s exploration portfolio includes twovery prospective exploration plays – Block 1101in Madagascar covers 14,900 sq km in East Africasmost prolific oil provinces with billion barrel potentialand in Tunisia our Deep Triassic covers over 130 sq kmwith seismic that suggests the prospect could be anequivalent to the TAGI formation, a prolific reservoir Deep Triassicin Algeria, Libya and southern Tunisia. Madagascar has reported 30 billion barrels of discovered tar sands / heavy oil and lighter oils have also been discovered onshore. In Madagascar, the first major milestone was achieved in June - obtaining a one year extension to the exploration permit. Subsequent to this, Candax progressed the necessary logistical and environmental work necessary as preparation for completing the agreed work program in 2011. The Environmental Impact Assessments (“EIAs”) and preparative logistics were slower than initially anticipated, but EIAs have been successfully completed on both areas of interest – Ambilobe and Ampasindava. It is Candax’s firm intention to remain on this block, but we are looking to reduce our working interest, in line with our core focus on near-term production assets. 2D and 3D seismic performed on the Deep Triassic identified potential of over 3 Tcf of gas. The Deep Triassic remains a significant element in the Candax portfolio. However, Candax’s Madagascar Country Manager, in 2010 attention has been focused on the near-term production gains that can be Raharivola Danielson, leading the Ambilobe achieved from existing proven assets, with a view to underpinning the future of public consultation in Antsohimbondrona, Madagascar. Candax via sustainable revenues. Notwithstanding this, geological studies have reviewed, and reached very positive conclusions, on the potential of the Deep Triassic. Candax is evaluating various options for the future drilling of these prospects, given the diverse challenges that such drilling will present and has progressed dialog with the various interested parties that would participate in drilling the Deep Triassic. 7 candax energy inc. annual report 2010
Board of Directors Candax’s board delivers the right mix of experience, competence and culture to define and guide the current operational strategy and the growth strategy for the years ahead. Benoit Debray M’hamed Ali Bouleyman Steven Drinkwater DELIVERING Chairman Director Director Chairman, Ecumed Petroleum WITH EXPERIENCE Christopher O. Irwin Dr. Richard J. H. Norris Thomas Rebilly Director President, CEO and Director Director 8candax energy inc. annual report 2010
Candax_AR10_pg9_40_v1.8.qxd:Layout 1 6/3/11 9:25 AM Page 9 MANAGEMENT‘S DISCUSSION AND ANALYSIS The following Management’s Discussion and Analysis (“MD&A”) for Candax Energy Inc. and its wholly-owned subsidiaries (“Candax” or the “Company”) should be read in conjunction with the accompanying audited consolidated financial statements and notes for the year ended December 31, 2010, as well as the MD&A and the audited consolidated financial statements for the year ended December 31, 2009. Readers should also refer to a discussion of forward-looking statements contained at the end of this MD&A. Additional information relating to Candax, including its Annual Information Form for the year ended December 31, 2010 is available on SEDAR at www.sedar.com. This information is presented as of March 31, 2011. Company Overview Candax is engaged in the exploration for and the acquisition, development and production of natural gas and crude oil. Its assets are located in Tunisia and Madagascar. Candax also owns a 50% interest in Société d’Electricité d’El Bibane (“SEEB”), a Tunisian power generation company. Foreign Exchange Fluctuations Candax operates primarily in a US dollar-based environment. The majority of the Company’s revenues and expenses are paid in US dollars, although Candax is also exposed to Canadian dollar, Euro, Pounds Sterling and Tunisian Dinar costs. However, being a Canadian company trading on the TSX, Candax has elected to report its financial results in Canadian dollars. Accordingly, all foreign currency amounts presented in Candax’s consolidated statements of operations and deficit and cash flows are converted to Canadian dollars for reporting purposes based on the average Canadian to US dollar exchange rate prevailing during the reporting period. The US to Canadian dollar closing exchange rate on December, 2010 was $.9946 (2009 – $1.0510) and averaged $1.0131 (2009 – $1.0571) during the fourth quarter of 2010 and $1.0303 (2009 – $1.1420) for the year. Capital Structure and Dilution At December 31, 2009, Candax had 169,261,606 common shares outstanding. On March 31, 2010, Candax issued 144,444,444 common shares at $0.09 per common share through a private placement and on May 27, 2010 Candax issued 75,666,666 common shares at $0.08 per common share through the exercise of warrants to bring the total number of common shares outstanding at December 31, 2010 to 389,372,716. On February 4, 2011, pursuant to the terms of the Debt Restructuring Plan, Candax issued 464,193,161 common shares of EL BIBANE the Company to Geofinance in consideration for the cancellation of US $22 million of bank debt and US $1.0 million in bank fees, which amounts were originally owing under the Company’s banking facility with the Bank of Scotland, and subsequently assigned to Geofinance pursuant to the Debt Restructuring Plan, and the conversion of a shareholder loan in the amount of EUR 2 million owing to Geofinance. The shares were issued at $0.055 per share, which price represents the five-day weighted average trading price of Candax shares on the TSX, ended Thursday, February 3, 2011. The average EURCAD and USDCAD exchange rates over the same five-day period were used to determine the number of shares to be issued. The new common shares issued represent 119% of the number of common shares of the Company issued 9 and outstanding just prior to the issuance, and as a result of this issuance, Candax now has 853,565,877 common shares outstanding as of March 31, 2011, of which Geofinance holds 684,304,271 representing 80.17%. candax energy inc. annual report 2010 At December 31, 2009, the Company did not have any warrants outstanding, however, in connection with the above-mentioned private placement the Company issued 86,666,666 warrants on March 31, 2010. On May 27, 2010, 75,666,666 warrants were exercised at an exercise price of $0.08 per share, leaving 11,000,000 warrants outstanding at December 31, 2010. The 11,000,000 warrants outstanding at December 31, 2010 expire on March 31, 2011. At December 31, 2009, the Company had 10,700,000 stock options outstanding at an average exercise price of $0.78. During the year, 7,100,000 options at an average exercise price of $0.80 expired and 3,050,000 options an average exercise price of $0.74 were forfeited, leaving 550,000 options at an average exercise price of $0.79 outstanding at December 31, 2010. During the first quarter of 2011, 200,000 options at an average exercise price of $0.97 per share expired leaving 350,000 options at an average exercise price of $0.72 per share outstanding at March 31, 2011. Business Development Activities Candax’s objective is to build a high-growth international portfolio of oil and gas assets. Review of Operations El Bibane is an oil and gas field located offshore Tunisia. Candax is the operator and holds a 73.8% working interest. The field re-development plan comprised three wells, El Bibane-3, 4 and 5. Oil production was constrained initially by capacity limitations in the export line, which, as a consequence of higher than expected water production, prevented simultaneous production from the El Bibane-3 and El Bibane-4 wells. Production has been further constrained by mechanical failures in these two wells identified in the course of a barge-based intervention program in September 2009. Remedial work programs to restore production were prepared. The first of these programs to restore production from El Bibane-3 commenced in March 2010 and was completed in April 2010. The work-over successfully retrieved the parted tubing from the well and it was determined that a packer failure and slippage of the entire down-hole production string had occurred which caused the original tubing break. After repair, the well was initially restarted under gas-lift on April 12, 2010 with evidence of liquids coming to surface, but this was curtailed by surface valve problems. Once the surface valve was reopened the gas-lift pressure remained low and no further liquids were seen on surface. Subsequent tests indicate that the replaced tubing failed, most likely at approximately the same depth as the original break. Although this result was disappointing, the reconnection work-over was considered to be a temporary fix to the existing tubing configuration, and it was recognized from the outset that further work would be required for a permanent solution, which work was planned for Phase 2 of the well interventions.
Candax_AR10_pg9_40_v1.8.qxd:Layout 1 6/3/11 9:25 AM Page 10 MANAGEMENT‘S DISCUSSION AND ANALYSIS SEEB Phase 2 of the program for the El Bibane-3 well was designed during the second quarter of 2010 and the work started on July 24, 2010. The operation to remove the broken tubing from the El Bibane-3 well retrieved all but the last 200 metres of existing tubing and packer. The plan of extending the tubing into the reservoir to limit the influx of water and running logging tools to better understand the reservoir was not possible due to the inability to remove the entirety of the old tubing. The tubing was found in extremely poor condition and thus fishing operations were suspended after considerable efforts. A casing integrity tool confirmed that the casing is in acceptable condition, and thus a new completion was installed down to the top of the broken tubing. Fluid losses during fishing indicated that there was communication across the fish. The well was successfully put back on production on Friday, September 10, 2010 using gas-lift with gas supplied from the El Bibane 5 well (gas-lift is being operated as a closed loop to minimize flaring, with all high-pressure gas being re-circulated). Oil production had stabilized at approximately 100 to 150 barrels of oil per day with some 95% water-cut, production that is comparable to the overall volume of liquids that the well was producing prior to the well’s tubing failure in 2009. Prior to that tubing failure, the El Bibane-3 well was producing under natural flow and we expect that the well will revert to this behaviour. It is, however, not possible to predict exactly when this will occur. Prior to making a decision on the design of the next phase of the El Bibane program, Candax has decided to conduct a full field simulation study and has contracted a French firm, BEICIP-Franlab, to complete such. The study is currently ongoing and is expected to be completed in May 2011. The study will make recommendations as to the best alternatives to produce the remaining reserves of the El Bibane field. Candax believes that the acquisition and processing of 3D seismic will be required to increase knowledge of the El Bibane field. EZZAOUIA Candax has a 50% equity interest in Société d’Electricité d’El Bibane (“SEEB”), a Tunisian company which owns and operates a gas-fired 27 MW single cycle electricity generation plant. Gas is supplied to SEEB primarily from El Bibane. The generating capacity of the power plant was reduced by 50% from early May to December 2009 as a consequence of the failure of one of the two gas-fired turbines. The damaged turbine has been replaced though operations are presently constrained by the interruption of gas supply form the El Bibane field. Due to the interruption in gas supply from the El Bibane field, SEEB has not produced any power since early January 2010. Due to the uncertainties as to the production of the El Bibane field, it is not possible for management to predict when SEEB will resume its operations and what daily volume of gas will be delivered to SEEB. As a result of reduced generating capacity, SEEB has been unable to meet its obligations under bank financing arrangements to make repayments of principal and interest. As a consequence of the payment arrears, SEEB has received several default notices from the lenders under its bank facility. As a consequence, the loans can be called by the lenders at anytime. The Company and Caterpillar exercised joint control over the SEEB operations, however, during the fourth quarter of 2010, the banks, as lenders, started to impose tighter control over the day-to-day operations of SEEB. As a result of the actions by the banks, it was determined that the Company no longer exercised joint control over SEEB and consequently it was no longer appropriate to proportionately consolidate SEEB’s results. In accordance with Canadian GAAP, the investment in SEEB was deconsolidated and recognized at cost. As a result of the deconsolidation, a charge of $1.1 million was expensed in the consolidated statements of operations and deficit. The Company reviewed the financial position of SEEB and determined that no amounts will be recoverable from this investment. The Company has no future financial obligation to SEEB or its lenders. Ezzaouia is primarily an on-shore oil field located in Tunisia producing small quantities of associated gas. The Ezzaouia field is operated by Maretap, a company owned by the interest holders in the field which include Candax and Entreprise Tunisienne d’Activités Pétrolières (“ETAP”), the Tunisian state-owned oil company. Candax owns a 31.4% working interest. 10 On July 22, 2010, the operator hooked up a side-track on the Ezzaouia-5 well. Open-hole log data showed the reservoir intervals to have lower than expected oil saturations and the production of the well was indeed disappointing, peaking at 70 barrels per day before going down to zero (100% water cut) after a few weeks. The Ezzaouia-5 well is currently shut-in and the partners are reviewing their options to determine the bestcandax energy inc. annual report 2010 solution to resume production from that well, which may involve perforating other layers. The work-over of the Ezzaouia-1 well was completed on September 21, 2010. The well has shown disappointing production and a slickline intervention is ongoing to install a blanking sleeve in the tubing and to test the completion to identify any possible leakage. The Ulysse rig then moved to the sidetrack of the Ezzaouia-2 well. This sidetrack was temporarily suspended mid-October due to mechanical difficulties with the rig’s pump equipment. The equipment required to be able to continue with the sidetrack was received around March 20, 2011 and the work has resumed. While awaiting replacement parts, the rig was moved to the Ezzaouia-11 well location to remove the existing completion, mill the existing packer, install a new packer and a new completion. Tie-in was completed mid-November. Because of lower than expected production, it was decided to conduct a slickline operation to evaluate the formation, which is ongoing. The well will then be produced with swabbing. After the tie-in was completed on the Ezzaouia-11, the rig moved to the Ezzaouia 9 well to retrieve the coiled tubing and run a new completion. The workover was completed in January 2011. Tests are ongoing to optimize the injection pressure to improve production.
ROBBANA FIELDCandax_AR10_pg9_40_v1.8.qxd:Layout 1 6/3/11 9:25 AM Page 11 MANAGEMENT‘S DISCUSSION AND ANALYSIS CHAAL PERMIT Candax is conducting a reinterpretation of the 3D seismic previously acquired to enhance its understanding of the various horizons, including the Deep Triassic, present in the Ezzaouia field. We expect that this reinterpretation of seismic will identify infill drilling locations and will optimize the future work program to yield better results than the 2010 campaign. Robbana is an on-shore oil field located in Tunisia. Candax is the operator and holds an 80% working interest. As a consequence of declining well productivity, production from the field was suspended in May 2009 pending drilling and completion of a planned sidetrack of the Robbana-1 well. MHA Petroleum Consultants LLC (“MHA”) and Petroleum Insights Sàrl (“Petroleum Insights”) have completed a full-field simulation study. From their analysis of the various pressure response data from the field during its 17 years production history Petroleum Insights and MHA have MADAGASCAR identified between 18 and 25 million bbls of oil in place and 4.3 to 5.8 million bbls of recoverable volumes, assuming a waterflooding program is implemented. Candax has initiated a workover, expected to be completed in April. The objectives of the workover are: (1) to take pressure measurements to further refine estimates of oil in place; (2) to obtain bottom hole samples for PVT analysis; and (3) to reestablish production. The data collected will enable Candax to better prepare for a probable stimulation workover of this well mid-year as well as for the anticipated redevelopment of this field. Based on the positive evaluation of Petroleum Insight’s study, the design of an optimal water-flooding program is also being initiated. Chaal is an on-shore exploration permit located in central Tunisia approximately 50 kilometres west of the city of Sfax, covering an area of 1,200 square kilometres. An initial exploration well, Chaal-1, was drilled by Candax in 2006 but could not be tested due to formation damage caused by the heavy mud weights required to manage the high pressures encountered. Candax and its partners subsequently committed to drill a deviated sidetrack of the Chaal-1 well using managed pressure drilling to further evaluate the commerciality of the gas discovery and as a condition of securing an extension of the Chaal Permit to May 25, 2010. In May 2010, Candax and its partners requested an extension of the permit but the Tunisian authorities have informed Candax that they were not in a position to approve the extension. On September 24, 2010, the decision to cancel the permit was published in the official gazette of the Republic of Tunisia. The authorities are seeking penalties arising from the non-fulfillment of the committed work program. Discussions are ongoing between Candax, its partners and the Tunisian authorities to determine the amount, if any, of the applicable penalties. 11 candax energy inc. annual report 2010 Block 1101 is an on-shore exploration permit located in northwest Madagascar and covers 14,900 square kilometres. The Company is the operator with a 60% working interest. Results from the initial geological fieldwork, geochemistry and gravity/magnetics confirmed the exploration potential of Block 1101, indicating up to 9,000 metres of sedimentary section beneath the block together with numerous oil shows. In 2009, the Madagascar government approved a 12-month extension to the licence terms until July 30, 2010 and then in 2010 the licence was further extended until July 30, 2011 within which time Candax has a commitment to drill an exploration well. To accommodate this extension of the first exploration period the third exploration period will be reduced from two years to one year. Work has been continuing to identify a drilling location. Two alternative sites have been identified and discussions are continuing to determine the preferred location. The Environmental Impact Assessment is completed for one of the sites (the Ambilobe location) and is being finalized for the other location (Ampasindava). The design of the drilling program (including civil works requirement to bring equipment on site) is ongoing. Considering the size of the upcoming capex program and the risks associated with the prospects, Candax continues to explore farm-out discussions with several parties. There is no guarantee that these discussions will be successful. Non-Producing Assets The Belli and Al Manzah permits as well as the Deep Triassic are being re-examined as part of a full review of the portfolio of assets. Production from Al Manzah was characterized by a very energetic dynamic system with clear movement of fluid contacts. Having been shut-in the field will have partially re-segregated, and it is likely that modest volumes of oil are readily accessible. However, the final (failed) workover may have rendered the existing well useless. It is anticipated that, following further study, this field can resume production via new well. The reservoir is shallow, at some 800 metres. A study of the existing data on Belli coupled with a review of analogus fields and the literature by Petroleum Insights has indicated that the matrix STOIIP which is unlikely to have contributed to the production could be in the order of 50 MMbbls. It is conceivable, that in the timeframe of the shut-in (12+ years), that spontaneous recharging has occurred and that some of this oil may have migrated into the vugs/fractures. It is virtually impossible with the existing data to estimate the probability of this occurring, however Petroleum Insights suggests that there is a 10% probability of this having occurred. The Belli permit also has several promising exploration leads.
Candax_AR10_pg9_40_v1.8.qxd:Layout 1 6/3/11 9:25 AM Page 12 MANAGEMENT‘S DISCUSSION AND ANALYSIS Equity Investment On March 31, 2010, the Company completed an investment agreement with Geofinance N.V., an international upstream oil and gas company (“Geofinance”). Under the terms of the agreement, Geofinance invested $13.0 million in the Company to purchase 144,444,444 units of the Company at a price of $0.09 per unit, each unit comprising one common share and 0.6 of one common share purchase warrant for a total of 86,666,666 warrants. Each whole warrant may be exercised for a period of one year from the date of the closing of the transaction at a price equal to the current market price (calculated based on the weighted average trading price of the Company’s common shares for the five trading days immediately prior to the date of exercise). On May 27, 2010, Geofinance exercised warrants to acquire 75,666,666 common shares of Candax at an exercise price of $0.08 per common share for total proceeds of $6.4 million. As a consequence, at December 31, 2010, Candax had 389,372,716 common shares outstanding. Bank Loan Restructuring On March 31, 2010 Candax concluded an Amendment and Restatement Agreement with the Bank of Scotland by which the terms of the Borrowing Base Facility Agreement were amended and restated. The agreement provided for the extension of the maturity date of the facility to June 30, 2014 and rescheduling of repayments while splitting outstanding amounts into two tranches; the Borrowing Base Amount and an Excess Tranche. Interest on the Borrowing Base Amount was calculated at US$ LIBOR plus 4% and on the Excess Tranche at US$ LIBOR plus 9.5%. Under the terms of the Amendment and Restatement Agreement, a principal payment of US $8.0 million and restructuring fees of US $1.0 million were payable on December 31, 2010. Debt Restructuring Plan On February 4, 2011, the Company completed a two-step debt restructuring plan (the “Debt Restructuring Plan”). The key elements of the Debt Restructuring Plan are as follows: • On December 24, 2010, the Bank of Scotland, as sole lender under the Company’s US$45 million bank debt (the “Bank Debt”), assigned all rights and obligations under the Bank Debt to Geofinance • On February 4, 2011, Geofinance and Candax closed the restructuring of the Bank Debt and entered into a restructuring agreement (the “Restructuring Agreement”). The main terms and conditions of the Restructuring Agreement are: • In consideration for Geofinance converting US$22 million of the US$45 million Bank Debt into equity, Candax issued 396,590,242 shares to Geofinance, at a price of $0.055 per share (representing the five-day weighted average market price at the time of the issuance); • In consideration for Geofinance waiting the right to receive certain fees on December 31, 2010 in respect of the Bank Debt, Candax issued 18,116,963 shares to Geofinance; • Geofinance also converted the then existing EUR 2 million shareholder loan into 49,485,956 shares of Candax; • Geofinance and Candax entered into a restructured and amended loan agreement for the remaining US$23 million debt (the “Amended Loan Agreement”) and into a new US$10 million shareholder loan (the “Shareholder Loan”); • The Amended Loan Agreement is split into: (1) a seven-year, US$15 million senior term loan (itself split between a US$5 million tranche A priced at 4% and a US$10 million tranche B bearing interest at 4.5%, paid in kind), which will amortize over a five-year period starting on January 31, 2013 and (2) an eight-year, US$8 million junior term loan, bearing interest at 6%, paid in kind (the Company will also pay Geofinance a cash premium at maturity in order to provide a rate of return of 10% per annum to Geofinance). This junior term loan is repayable at maturity; • The Shareholder Loan has an eight-year maturity. The interest, payable in cash, is grid-based, with rates between 3.5% and 7.5%, depending on the cumulated drawdown by Candax under the Shareholder Loan. 12 As detailed above, Geofinance received a total of 464,193,161 new shares. As at March 31, 2011, Candax had a total of 853,565,877 shares outstanding (out of which 684,304,271 are owned by Geofinance).candax energy inc. annual report 2010 In order to obtain approval for the Debt Restructuring Plan in advance of the December 31, 2010 payment owing to Bank of Scotland (as discussed above under Bank Loan Restructuring), Candax relied on the financial hardship exemption provided by the TSX rules and Multilateral Instrument 61-101. Reliance on this exemption automatically results in a TSX review for continued listing to confirm that Candax continues to meet TSX listing requirements. The TSX Continued Listing Committee will convene to review the documents provided by Candax on April 12, 2011. Board of Directors John Cullen, Adrian Jackson and Michael Wood tendered their resignations as directors of the Company on March 31, 2010 and Thomas Rebilly, Dr. Richard Norris and Stephen Drinkwater were appointed in their stead. Biographies of the new directors were disclosed in the Company’s press release of March 10, 2010. At the Candax Annual General Meeting held on June 22, 2010, Adrian Loader, the former Chairman of Candax did not stand for re-election and Benoit Debray was elected by shareholders as disclosed in the Company’s press release of June 29, 2010. Murray Grant resigned from the board on November 25, 2010. M’hamed Ali Bouleymen was appointed in his stead on January 16, 2011. Christopher Irwin remains on the board of directors of Candax.
Candax_AR10_pg9_40_v1.8.qxd:Layout 1 6/3/11 9:25 AM Page 13 2009 2009 2009 2009 2009 MANAGEMENT‘S DISCUSSION AND ANALYSIS Oil (bbls/day) 1,063 1,152 582 483 818 Gas (mmcf/day) 3.5 2.9 1.2 2.3 2.5 BOEs/day 1,651 1,627 782 866 1,234 Revenue Sales, net of royalties for the three months ended December 31, 2010, were $nil (2009 – $9.1 million) and for the year ended December 31, 2010 were $0.7 million (2009 – $28.1 million). During the fourth quarter of 2010, the Company did not sell any barrels of oil (2009 – 114,211 barrels sold at an average price of US $68.48 per barrel) and on a year-to-date basis for 2010 the Company sold 9,454 barrels of oil at an average price of US Summary of Gross and Net Reserves $67.87 per barrel (2009 – 423,882 barrels sold at an average price of US $52.25 per barrel). The reduction in sales in 2010 was primarily a result Escalated Parameters, Forecast Prices and Costs of the El Bibane field being shut-in and of the natural decline in the production of the Ezzaouia field, which was not offset by the capital program BOE Oil Natural Gas implemented in 2010, as discussed above. Gross Net Gross Net Gross Net Reserves Category (Mboe) (Mboe) (Mbbl) (Mbbl) (MMcf) (MMcf) As a result of the shut-in of the El Bibane field, no gas was delivered to SEEB during the year and consequently, no electricity sales were Total Proved – All Categories 3.4 2.0 2.3 1.2 6,500 4.586 included in sales, net of royalties for the three months and year ended December 31, 2010 compared with sales of $0.5 million and $2.6 million for the same periods in 2009. Probable – All Categories 5.1 2.4 4.5 2.0 3,675 2,411 Total Proved Plus Probable 8.5 4.4 6.8 3.2 10,175 6,997 Production The following table summarizes the quarterly net production (after royalty production) for 2010 and 2009: Q1 Q2 Q3 Q4 Total BBLS 2010 2010 2010 2010 2010 265 154 160 244 206 – – – – – 265 154 160 244 206 Production for the three months and year ended December 31, 2010 was lower than the same periods in 2009 due to reduced production from the El Bibane and Ezzaouia fields as discussed earlier. Reserves 13 candax energy inc. annual report 2010 The following table outlines Ryder Scott’s forecasted future prices for each of oil and natural gas. These forecasts form the basis for Ryder Scott’s evaluation of the Company’s reserves at December 31, 2010 as outlined above. Crude Oil and Natural Gas Price Natural Gas Liquids US$/Mcf $US/Bbl 2011 0.42 83.49 2012 0.54 83.49 2013 0.55 83.49 2014 0.56 85.46 2015 0.57 87.25 Average thereafter 0.60 95.85 Where amounts are expressed on a barrel of oil equivalent (boe) basis, natural gas volumes have been converted to barrels of oil equivalent at 6,000 cubic feet to one barrel of oil equivalent (6 mcf = 1 boe). This conversion ratio is the convention used in the oil and natural gas industry and is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. The use of boe may be misleading, particularly if used in isolation. Operating Costs Operating costs for the year and three months ended December 31, 2010, were $8.9 million and $1.0 million respectively, compared to $9.8 million and $3.6 million for the same periods in 2009. Operating costs were lower for the year ended December 31, 2010 compared to 2009 due to reduced workover activity and the reversal of the year end accrual for the overlifting.
Candax_AR10_pg9_40_v1.8.qxd:Layout 1 6/3/11 9:25 AM Page 14 MANAGEMENT‘S DISCUSSION AND ANALYSIS Depletion, Depreciation and Amortization Expense For the year and three months ended December 31, 2010, depletion, depreciation and amortization was $2.6 million and $0.6 million, respectively, (2009 – $45.6 million and $24.5 million, respectively). Depletion is calculated using the purchase price of the acquired assets, capital expenditures and proved reserves as at year-end. The significant decrease in 2010 over 2009 was due to reduced sales during 2010. Asset Impairment Asset impairment for the year and three months ended December 31, 2010, was $nil and $nil respectively, (2009 – $20.6 million and $19.2 million, respectively). There was no impairment charge for 2010 as in 2009 writedowns were taken for Chaal in the amount of $10.2 million, Madagascar $3.5 million and an additional impairment charge of $4.6 million was taken after giving further consideration to potential impairment to the carrying value of its petroleum and natural gas properties by reference to a number of external factors including the market capitalization of the Company and the proposed transaction with Geofinance NV. Bad debt expense Bad debt expense for the year and three months ended December 31, 2010, was $1.1 million and $1.1 million respectively, (2009 – $nil and $nil, respectively). During 2010 the Company wrote off receivables from SEEB. General and Administrative Costs For the year and three months ended December 31, 2010, general and administrative costs were $10.2 million and $0.8 million, respectively, (2009 - $6.0 million and $1.7 million, respectively). The increase in costs over 2009 was primarily as a result of a provision made for government claims, severance payments made to the previous management and the bank loan restructuring fee (which has subsequently been waived by Geofinance – see Note 23, Subsequent Event) in the Consolidated Financial Statements for the year ended December 31, 2010. Loss on deconsolidation of joint venture interest For the year and three months ended December 31, 2010, the loss on deconsolidation of joint venture interest was $1.1 million and $1.1 million, respectively, (2009 – $nil and $nil, respectively). The Company and Caterpillar exercised joint control over the SEEB operations, however, during the fourth quarter of 2010, the banks, as lenders, started to impose control over the day-to-day operations of SEEB. As a result of the actions by the banks, it was determined that the Company no longer exercised joint control over SEEB and consequently it was no longer appropriate to proportionately consolidate SEEB’s results. In accordance with Canadian GAAP, the investment in SEEB was deconsolidated and recognized at cost. The Company reviewed the financial position of SEEB and determined that no amounts will be recoverable from this investment. The Company has no future financial obligation to SEEB or its lenders. Interest Expense Interest expense for the year and three months ended December 31, 2010 was $3.8 million and $1.1 million, respectively, (2009 – $4.5 million and $1.4 million, respectively). Interest expense for 2010 was lower than the same periods in 2009 primarily as a result of the restructuring of the SEEB debt in June 2009 as well as a stronger Canadian dollar; the term loan is denominated in US dollars and the loans in SEEB are denominated in US dollars and Euros. Foreign Exchange The unrealized foreign exchange gain for the year and three months ended December 31, 2010 was $0.6 million and $nil respectively (2009 – losses of $2.6 million and $1.3 million, respectively). The unrealized foreign exchange gain for 2010 compared to losses in 2009 was due to a stronger Canadian dollar and the revaluation of the Euro-denominated loan in SEEB. Related Party Transactions During the year, the Company had gas sales to SEEB of $ nil (2009 – $0.4 million) and at December 31, 2010 the Company had a receivable from 14 SEEB in the amount of $0.9 million (2009 – $0.8 million). The receivable amount has been fully provided for.candax energy inc. annual report 2010 At December 31, 2010, the Company had a related party term loan of US $44.5 million payable to its major shareholder, Geofinance. As described in the debt restructuring plan above, in February 2011, Geofinance cancelled US $22 million of the related party term loan and rescheduled the January 31, 2011 principal repayment to January 31, 2013, in exchange for common shares. The Company had a loan from its major shareholder, Geofinance, in the amount of EUR 2.0 million at December 31, 2010. As described in the debt restructuring plan above, in February 2011, Geofinance converted the shareholder loan into common shares. During the year, the Company’s major shareholder charged one of the Company’s subsidiaries $0.4 million for services provided by its employees in accordance with the services agreement.
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