CENTAURUS ENERGY INC. CENTAURUS ENERGY INC.
MANAGEMENT'S DISCUSSION & ANALYSIS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
MANAGEMENT'S DISCUSSION & ANALYSIS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(Unless otherwise indicated, all dollar amounts are in United States dollars ("USD"))
This Management's Discussion and Analysis of financial condition and results of operations ("MD&A") is based on information available to November 15, 2021 and should be read in conjunction with Centaurus Energy Inc.'s ("Centaurus" or the "Company") unaudited condensed interim consolidated financial statements for the three and nine months ended September 30, 2021 and the accompanying notes as well as the audited consolidated financial statements for the year ended December 31, 2020 and the accompanying notes. This MD&A contains forward-looking information about the Company's current expectations, estimates, projections and assumptions. See the Advisory for information on the risk factors that could cause actual results to differ materially and the assumptions underlying the Company's forward-looking information. Centaurus's Management prepared the MD&A, while the Audit Committee of the Centaurus Board of Directors (the "Board") reviewed and recommended its approval by the Board. Additional information relevant to the Company's activities contained in its continuous disclosure documents, including quarterly condensed interim consolidated financial statements and the Annual Information Form ("AIF"), is available on SEDAR at www.sedar.com and on the Company's website at www.ctaurus.com.
Basis of Presentation
This MD&A and the unaudited condensed interim consolidated financial statements and comparative information have been prepared in accordance with International Financial Reporting Standards ("IFRS" or "GAAP") as issued by the International Accounting Standards Board applying IAS 34. Unless otherwise indicated, all dollar amounts are in United States dollars ("USD"). Sales volumes are presented on a before royalties basis.
Non-GAAP Measures
Certain financial measures in this document do not have a standardized meaning as prescribed by IFRS, such as funds flow from (used in) operations, working capital and netbacks and therefore are considered non-GAAP measures. These measures may not be comparable to similar measures presented by other issuers. These measures have been described and presented in order to provide shareholders and potential investors with additional measures for analyzing the Company's ability to generate funds to finance its operations and information regarding its liquidity. The additional information should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS. The definition and/or reconciliation of each non-GAAP measure is presented in the Netbacks and Reconciliation of Cash Flow from (used in) Operating Activities and Funds Flow from (used in) Continuing Operations sections of this MD&A.
Funds flow from (used in) continuing operations per share is calculated using the same basic and diluted weighted average number of shares for the period, consistent with the calculations of loss per share.
The term barrels of oil equivalent ("boe") may be misleading, particularly if used in isolation. Per boe amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil. This equivalence is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
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Introduction
Centaurus Energy Inc. ("Centaurus", or the "Corporation") is an independent, Canadian company focused on Argentine upstream oil and gas with operations. The Corporation is implementing horizontal drilling and completions technology to develop both its conventional and resource plays.
Centaurus trades on the TSX Venture Exchange ("TSXV") under the symbol CTA and on the OTCQB under the symbol CTARF. Centaurus' Argentine upstream oil and gas operations as well as the corporate segment are discussed in the "Continuing Argentine Operations and Corporate Segments" section of this MD&A. Unless specifically noted, all current and comparative reporting periods' operating and financial disclosures and discussion are in reference to the continuing Argentine operations and corporate segments.
2021 Highlights
Coirón Amargo Sur Este ("CASE"); Assignment agreement to transfer the participating interest to Pan American Energy ("PAE")
On January 22, 2021, Centaurus and PAE interested into an assignment agreement, transferring to PAE a six percent (6%) working interest in CASE for an amount of $8.4 million, with retroactive effect as of July 1, 2020. The $8.4 million represented the value of cash call requests relating to the operating and capital expenditures for the period from April 2020 through December 31, 2020. Pursuant to the assignment agreement, Centaurus remedied its default under the Joint Venture Agreement with respect to the cash calls unpaid and cured its default under the Loan Agreement.
On April 28, 2021, Centaurus entered into an agreement to sell its remaining working interest (29%) in CASE, with an effective date of January 1, 2021, in return for consideration with a reference value of more than $51 million, including:
- satisfaction of all amounts owed by the Company under the Loan Agreement and termination of the Loan Agreement, and
- payment to Centaurus, over time, of a 2.5% Overriding Royalty Interest (ORRI) over the net proceeds corresponding to the 29% interest being assigned to PAE, totaling $25 million.
The proposed assignment is subject to certain conditions precedent that are customary in this type of transaction.
Palmar Largo operation agreement
On January 15, 2021, the Company relinquished the Palmar Largo concession.
El Chivil end of concession
On February 2, 2021, the Company relinquished its El Chivil concession.
Curamhuele; exploratory permit expiration
On March 16, 2021, the Company's exploratory permit relating to the Curamhuele block expired.
Impact of the Coronavirus COVID-19
In March 2020, the World Health Organization declared COVID-19 a global pandemic. Since that time, the oil and gas industry has experienced significant volatility with commodity prices, and in particular oil prices, as a result of a decline in economic activity and lower demand for commodities in both Canada and around the world. In the second half of 2020 and into 2021, oil prices have partially recovered from the lows that occurred in the second quarter of
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2020 as restrictions eased and vaccines started to be administered. In early 2021, full demand recovery remains uncertain as countries are at various stages of rolling-out vaccines while virus outbreaks continue to occur, mainly due to new variants which has resulted in activity restrictions.
Responses to the spread of COVID-19 have resulted in a significant increase in economic uncertainty in Argentina, with more volatile commodity prices, currency exchange rates and a marked decline in long-term interest rates. These events have resulted in a volatile and challenging economic climate which has adversely affected the Company's operational results and financial position.
Grant of options
On January 8, 2021, the Corporation announced the grant of 24,205,954 options to officers, directors, employees and consultants pursuant to the Company's stock option plan, exercisable at a price of USD 0.04337 (CAD 0.055) per share and expiring on January 8, 2026. In addition, the Company and certain option holders have agreed to cancel 2,700,000 previously issued options originally issued in April 2018 and 600.000 issued in January 2021. The issuance of options is subject to Exchange approval and the shares issuable upon exercise of the options may not be traded for 4 months and one day from the date of grant.
Management Changes
Steven Azarbad, the Company's interim CFO since March 2020 has relinquished his position. Mr. Azarbad remains a member of the Board of Directors. David Tawil, the Company's interim CEO, has assumed the duties of Mr. Azarbad.
Agreement to Transfer All Conventional Oil and Gas Assets and Related Liabilities to Humble Energy
On September 27, 2021, the Corporation announced that it has entered into an agreement with Humble Energy S.A., an oil and gas corporation based in Argentina controlled by Humble Energy Inc-, whereby Humble will purchase all of the issued and outstanding membership interests in the capital of MEA, the Company's operating subsidiary (the "Proposed Transaction").
Pursuant to the Proposed Transaction, Humble will purchase all of the MEA membership interests in consideration for Humble's assumption of all liabilities with respect to MEA except for any liabilities related to Centaurus' interests in CASE, Curamhuele, any liabilities related to any incentive plans, stock options or any other benefits granted to any employees or officers of MEA by Centaurus or its affiliates, and any liabilities relating to MEA's affiliation with Alejandro Augusto Peñafiel and José David Peñafiel. All rights and causes of action of MEA arising against any and all prior directors and officers of Centaurus will remain with Centaurus.
In addition to conditions usual to transactions of this nature, the Proposed Transaction will be subject to the fulfillment of the following conditions precedent on or before December 31, 2021 (i) the closing of the sale of the working interest of MEA in the CASE block to PAE, which was previously announced on April 28, 2021, including the transfer to Centaurus of a certain overriding royalty in the amount of US$25,000,000 to be paid to MEA under the terms and conditions described in the CASE assignment to PAE (the "PAE ORRI"), and (ii) the settlement between the Province of Neuquén and MEA of the liabilities relating to the Curamhuele block.
The effect of the Proposed Transaction will be that, upon completion, the Company will have transferred indirectly all of its conventional oil and gas assets and related liabilities to Humble, retaining only the PAE ORRI while liabilities relating to CASE and Curamhuele will have settled as a condition to closing of the Transaction.
On October 20, 2021, the parties announced that, in furtherance of the Proposed Transaction, Humble will enable MEA to make an upfront payment of US$6,000,000 to the Province of Neuquén to settle liabilities related to
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Curamhuele. In exchange, MEA will transfer to Centaurus US$17,000,000 of the total overriding royalty amount of US$25,000,000, to be paid to MEA under the terms and conditions described in PAE ORRI in settlement of all intercompany debts and obligations owed by Centaurus to MEA.
Foreign Exchange Fluctuations
The table below provides various exchange rates that illustrate the quarterly foreign exchange fluctuations between the USD, the Argentine Peso ("ARS"), and the Canadian dollar ("CAD"). The table illustrates the impact of both the ARS and CAD changes relative to the USD in the three and nine months ended September 30, 2021 compared to the three and nine month ended September 30, 2020. Foreign exchange changes in CAD and ARS impact the unrealized foreign exchange gains and losses recorded in the condensed interim consolidated statements of income (loss).
Three months ended | Nine months ended | |||||
September 30 | % | September 30 | % | |||
USD | 2021 | 2020 | Change(1) | 2021 | 2020 | Change(1) |
Average CAD to USD | 0.794 | 0.751 | 5.72% | 0.799 | 0.739 | 8.21% |
Average ARS to USD | 0.010 | 0.014 | (24.64%) | 0.011 | 0.015 | (27.65%) |
Period end CAD to USD | 0.785 | 0.750 | 4.69% | 0.785 | 0.750 | 4.69% |
Period end ARS to USD | 0.010 | 0.013 | (22.85%) | 0.010 | 0.013 | (22.85%) |
- Differences calculated from the numbers within the table are due to rounding.
Continuing Argentine Operations and Corporate Segments
Sales Volumes
Three months ended | Nine months ended | |||
September 30 | September 30 | |||
2021 | 2020 | 2021 | 2020 | |
Crude oil and NGLs (bbls/d) | 1,002 | 2,154 | 1,078 | 2,136 |
Natural gas (mcf/d) | 760 | 1,029 | 746 | 1,186 |
Total daily sales (boe/d) | 1,129 | 2,325 | 1,202 | 2,334 |
% oil | 89% | 93% | 90% | 92% |
Centaurus's primary producing concessions are at Coirón Amargo Sur Este ("CASE"), Puesto Morales and El Surubí. All concessions produce oil and Puesto Morales also produce natural gas. Approximately 96% of Centaurus' current production comes from Coirón Amargo Sur Este ("CASE"), Puesto Morales, and El Surubí.
Crude oil and NGL sales volumes for the three months ended September 30, 2021 ("the Quarter" or "Q3-2021") decreased to 1,002 bbl/d from 2,154 bbl/d for the three months ended September 30, 2020 ("Q3-2020"). The change compared to Q3-2020 can be attributed to the decrease in Palmar Largo and Chivil due to the concessions being relinquished during Q1-2021.
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Centaurus Energy Inc. published this content on 19 November 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 19 November 2021 14:53:06 UTC.
