MANAGEMENT DISCUSSION AND ANALYSIS
For the Three Months Ended December 31, 2021
This Management‘s Discussion and Analysis (“MD&A”) has been prepared by the management of Permex Petroleum Corporation (“Permex” or the “Company“) as of March 1, 2022, and should be read in conjunction with the unaudited interim consolidated financial statements and related notes of the Company for the three month period ended December 31, 2021, and the audited consolidated financial statements of the Company together with the related notes thereto for the year ended September 30, 2021. The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). All amounts are stated in Canadian dollars unless otherwise indicated.
This MD&A contains certain forward‐looking information and statements. The use of any of the words “target”, “plans”, “anticipate”, “continue”, “estimate”, “intends”, “expect”, “may”, “will”, “project”, “should”, “believe”, “potential”, and similar expressions are intended to identify forward-looking information. Forward-looking information is based on management’s current expectations and projections about its future results. Forward-looking statements are statements that are not historical facts, and include, but are not limited to, estimates and their underlying assumptions; statements regarding the Company’s plans, objectives and expectations with respect to future operations, the production of oil and gas from the Company’s properties, the potential acquisition of additional properties, capital raising initiatives, the impact of industry and macroeconomic factors on the Company’s operations, and market opportunities; and statements regarding future performance.
Forward-looking statements used in this MD&A are subject to various risks, uncertainties and other factors, most of which are difficult to predict and are generally beyond the control of the Company. These risks, uncertainties and other factors may include, but are not limited to, those set forth under “Risks and Uncertainties” below.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this MD&A or as of the date otherwise specifically indicated herein. Due to risks, uncertainties and other factors, including the risks, uncertainties and other factors identified above and elsewhere in this MD&A, actual events may differ materially from current expectations. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by securities law.
Permex was incorporated on April 24, 2017 under the laws of British Columbia, Canada. The Company is primarily engaged in the acquisition, development and production of oil and gas properties in North America. The Company focuses on acquiring producing assets at a discount to market, increasing production and cash-flow through recompletion and re-entries, secondary recovery and low risk infill drilling and development. Currently, Permexowns and operates various oil and gas properties located in Texas and New Mexico, USA. The Company also holds various royalty interests in 73 wells and 5 permitted wells across 3,800 acres within the Permian Basin of West Texas and southeast New Mexico.
The Company’s common shares are listed on the Canadian Securities Exchange (the “CSE”) under the symbol “OIL” and on the OTCQB under the symbol “OILCF”, on the OTCQB under the symbol “OILCF“, and on the Frankfurt Stock Exchange under the symbol “75P“.
Impact of Covid-19
In March 2020 the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and any related adverse public health developments, has adversely affected workforces, economies, and financial markets globally, potentially leading to an economic downturn. It is not possible for the Company to predict the duration or magnitude of the adverse results of the outbreak and its effects on the Company’s business or ability to raise funds at this time. The Company is closely monitoring developments and adapting its business plans accordingly.
Given the fact oil prices are showing strength as world economies continue to open post pandemic, management will continue bringing its previously shut-in wellbores online. Currently the Pittcock North, Mary Bullard and Henshaw fields are back in production with anticipated increase in production to occur in the months to come as management adds to the number of producing wellbores on each field including the newly acquired Breedlove “B” property situated in Martin County, Texas.
OIL AND GAS PROPERTIES
The following table shows a summary of the Company’s reserves as at September 30, 2021 and September 30, 2020 which have been derived from the independent appraisal reports prepared by MKM Engineering using standard engineering practices generally accepted by the petroleum industry and conform to those classifications defined in the Canadian Oil and Gas Evaluation Handbook (“COGEH”).
The Breedlove “B” Clearfork properties situated in Martin County, Texas are over 12 contiguous sections for a total of 7,870.23 Gross and 7,741.67 Net acres, of which 98% is held by production (“HBP”) in the core of the Permian Basin. There is a total of 25 vertical wells of which 12 are producers, 4 are saltwater disposal wells (“SWD”) and 9 that are shut-in opportunities. Permex holds a 100% working interest and an 81.75% net revenue interest in the Breedlove “B” Clearfork Property.
In January 2022, the Company began the pilot re-entry on the Carter Clearfork well #5, one out of the 69 shut-in wells it currently owns. The re-entry involved targeting the Clearfork formation at a depth of 7,200 feet. Due to the high water concentrating in the fluid entry, management will be installing appropriate flow-lines from this well to the injections wells on the property prior to putting the well back on pump. By doing so management is avoiding unnecessary operating expenses from water disposal in third party disposal facilities.
Pittcock Leases – Texas
The Pittcock Leases are situated in Stonewall County. Stonewall County is in Northwest Texas, in the central part of the North Central Plains and consist of the Pittcock North property, the Pittcock South property and the Windy Jones Property.
The Pittcock North property covers 320 acres held by production. There is currently one producing well, ten shut-in wells, two saltwater disposal wells, and a water supply well. Permex holds a 100% working interest in the Pittcock North Property, and an 81.25% net revenue interest.
The Pittcock South property covers 498 acres in four tracts. There are currently 19 shut-in wells and two saltwater disposal wells. Permex holds a 100% working interest in the lease, and a 71.90% net revenue interest.
The Windy Jones Property consists of forty acres and includes two injection wells and two suspended oil wells. The sole purpose of the Windy Jones property is to provide waterflood to the offset wells being the Pittcock wells located east boundary of the Windy Jones property. Permex holds a 100% working interest in the Windy Jones Property, and a 78.9% net revenue interest.
Mary Bullard Property – Texas
The Mary Bullard Property is located in Stonewall County, about 5 ½ miles south west of Aspermont, Texas. The asset is situated on the Eastern Shelf of the Midland Basin in the central part of the North Central Plains. The Mary Bullard Property covers 241 acres held by production and is productive in the Clearfork formation at a depth of approximately 3,200 feet. There is currently one producing well, four shut-in wells, and two water injection wells. Permex holds a 100% working interest in the Mary Bullard Property, and a 78.625% net revenue interest.
West Henshaw Property and Oxy Yates Property – New Mexico
The West Henshaw Property is located in Eddy County, New Mexico, 12 miles northeast of Loco Hills in the Delaware basin. Eddy County is in Southeast New Mexico. It is bounded by Chaves County to the north, Otero County to the east, Loving County, Texas to the south, and Lea County to the west. The West Henshaw Propertycovers 1,880 acres held by production. There are nine shut-in wells and four saltwater disposal wells. Permex holds a 100% working interest in the West Henshaw Property, and a 72% net revenue interest.
In January 2022, the Company began the pilot re-entry on the West Henshaw well #15-3, one out of the 69 shut-in wells it currently owns. The re-entry and re-stimulation involved the West Henshaw property targeting the Grayburg formation at a depth of 2,850 feet.
The recompletion was successful and came online at an initial rate of 30 barrels of oil per day (“bopd”) and has stabilized at 15 barrels of oil per day (“bopd”). Management believes the production rates from this mature, long-life well to continue with less than 10% decline year on year (“YoY”). The remaining 68 shut-in wells that the Company plans to re-enter have potential to yield similar results increasing the company’s total daily production solely by re-entering shut-in wells.
The Oxy Yates Property is located in Eddy County, approximately eight miles north of Carlsbad, New Mexico in the Delaware Basin. The Oxy Yates Property covers 680 acres held by production. There is one producing well and nine shut-in wells. The Yates formation is located at an average depth of 1,200 feet and overlies the Seven River formation and underlies the Tansill formation. Permex holds a 100% working interest in the Oxy Yates Property, and a 77% net revenue interest.
DISCUSSION OF OPERATIONS
During the three months ended December 31, 2021, the Company reported a net loss of $1,037,993 as compared to a net loss of $147,763 for the three months ended December 31, 2020. Revenue for the first quarter consisted of oil and gas sales of $113,376 (2020 – $3,967) and royalty income of $20,739 (2020 – $nil). Revenue was mainly generated from the Company’s newly acquired Breedlove “B” Clearfork leases. The Company also brought Pittcock North and Mary Bullard wells back online. During the three months ended December 31, 2021, the Company expended $62,905 (2020 – $nil) in property development costs.
The general administrative expenses excluding depletion and depreciation and share-based payment expenses for the three months ended December 31, 2021 were $244,961 (2020 – $112,919). The variance was mainly attributable to:
Share-based compensation expenses of $764,894 (2020 – $1,300), a non-cash charge, are the estimated fair value of the stock options granted and vested during the period. The Company used the Black-Scholes option pricing model for the fair value calculation.
SUMMARY OF QUARTERLY RESULTS
The following table sets forth selected unaudited financial information for the Company’s eight most recent quarters ending with the last quarter for the three month period ended December 31, 2021.
For the Three Months Ended
Dec. 31, 2021
Sept. 30, 2021
Jun. 30, 2020
Mar. 31, 2020
LIQUIDITY AND CAPITAL RESOURCES
As at December 31, 2021, the Company had a cash balance of $304,080, an increase of $271,289 from the cash balance of $32,791 on September 30, 2021. During the three months ended December 31, 2021, cash used in the operating activities is $374,483. The Company spent $10,907 on capital expenditures on its oil and gas assets and $17,532 on office lease payments. The Company received net proceeds of $670,284 from a private placement financing.
The Company had a working capital deficiency of $205,467 as at December 31, 2021 compared to a working capital deficiency of $589,820 as at September 30, 2021.
Management estimates that the gross revenue from oil and gas sales for the next 12 months will be approximately $1,400,000 and the general administrative expenses, excluding accretion, depletion and depreciation, and share-based payment expenses, will be approximately $800,000. In addition, the Company expects to invest additional capital on its oil and gas project development. At present, the Company does not have sufficient working capital to meet these anticipated operating and capital requirements. The Company will continue to monitor the current economic and financial market conditions and evaluate their impact on the Company’s liquidity and future prospects.
The Company has incurred losses since inception and not yet achieved profitable operations. The Company‘s ability to continue as a going concern is dependent on its ability to obtain adequate financing on reasonable terms from lenders, shareholders and other investors and/or to commence profitable operations in the future. While the Company has been successful in securing financing to date, there can be no assurances that it will be able to do so in the future. The aforementioned factors indicate the existence of a material uncertainty which may cast significant doubt about the Company’s ability to continue as a going concern. Management believes it will be able to raise equity capital as required in the long term, but recognizes there will be risks involved that may be beyond their control. The annual and interim financial statements do not include any adjustments to the recoverability and classification of reduced asset amounts and classification of liabilities that might be necessary should the Company be unable to continue operations. These adjustments could be material. The Company is not subject to material externally-imposed capital constraints.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
RELATED PARTY TRANSACTIONS
Included in amounts due to related parties are $1,683 (September 30, 2021 – $1,683) related to services rendered to the Company by a director of the Company and $4,095 (September 30, 2021 – $167) in advances from the CEO of the Company. Amounts due to related parties are unsecured, non-interest bearing, and have no specific terms of repayment.
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Permex Petroleum Corp. published this content on 11 April 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 11 April 2022 04:18:09 UTC.
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