Canada Southern Posts Second Quarter Profit CALGARY, Alberta, Aug.
13 /PRNewswire-FirstCall/ -- Canada Southern Petroleum Ltd. (the
Company) (NASDAQ/Pacific: CSPLF; Toronto/Boston: CSW) today
reported that net income for the three months ended June 30, 2004
was $570,000 ($0.04 per share) on revenues of $3.6 million,
compared to $1,370,000 ($0.10 per share) on $4.1 million for the
second quarter last year. Sales volumes continue to decline as a
function of expected natural declines at most of the Company's
producing properties and increasing water influx at Kotaneelee. For
the three months ended June 30, 2004, total volumes were down 12%
to 1,251 barrels of oil equivalent per day (boe/d) (converted at 6
mcf of gas to 1 boe) from the 1,418 boe/d recorded in the same
period last year. Kotaneelee sales volumes represent 63% of the
Company's total sales volumes during the second quarter of 2004
versus 76% in the comparable period of 2003. While the majority of
the properties declined year-over-year, production gains were
recorded at the Clarke Lake and Town properties. Operations Update
Individual Kotaneelee gross well production for the month of June
2004 was 6.8 Mmcf/d of natural gas from the B-38 well and 12.2
Mmcf/d from the I-48 well, compared to production in June 2003 of
8.6 Mmcf/d for B-38 and 13.0 Mmcf/d for I-48. Gross water
production for the month of June 2004 was 1,517 bbls/d from the
B-38 well and 435 bbls/d from the I-48 well, compared to production
in June 2003 of 1,167 bbls/d for B-38 and 113 bbls/d for I-48. As
previously disclosed, effective May 1, 2004, Canada Southern
converted from a 30.67% carried interest in the Kotaneelee gas
field to a 30.67% working interest. On May 3, 2004, the Company was
served by the field operator with a notice to commence drilling a
development well in the third quarter of 2004. Canada Southern has
elected to participate to its full 30.67% working interest. The
notice from the operator to drill and case the proposed well has an
estimated gross cost of $16,738,000, of which Canada Southern's
share is approximately $5,133,000. If the drilling of the well is
successful, it is estimated that a further $3,200,000 (gross) will
be incurred to complete and tie-in the well. It is expected to spud
on or about September 1, 2004 and the operator estimates it will
take approximately 150 days to drill the well. Canada Southern is
currently performing technical evaluation of its petroleum and
natural gas lease holdings in the Siphon and Mike/Hazel areas of
northeast British Columbia. The Company drilled and cased a 100%
working interest gas well at Siphon in late 2003. Several
formations were completed and tested during the first six months of
2004. The well is currently awaiting tie-in, with initial
production rates expected to be approximately 450 mcf/d (75 boe/d).
Canada Southern undertook a 25 sq. mile proprietary 3-D seismic
program at Mike/Hazel in late 2003 and the geophysical
interpretation has recently been completed. The Company may
undertake drilling in the winter drilling season of 2004/2005 at
Mike/Hazel depending upon the Company's consideration of the
geophysical and geological evaluations and economic analysis.
Notwithstanding earlier optimism at the 40 Mile Coulee area of
southern Alberta, where the Company drilled and cased 3 wells in
the 4th quarter of 2003, the Company does not plan further activity
in the area in the near future. Evaluation and interpretation of
the proprietary 2-D seismic shot in late 2003 has yet to support
further drilling initiatives in the area. While natural gas is
certainly present, current gas prices and the capital cost of
facilities and pipelines to produce these wells do not provide a
sufficient return on investment at the present time. Should gas
prices increase further, pipeline infrastructure move closer to
Company lands in the area, new geological data become available, or
economics improve, Canada Southern may revisit this decision.
Corporate Governance Update As previously reported, the Company's
Board of Directors has directed its Corporate Governance and
Nominating Committee to carry out a thorough review of the
Company's Articles of Association and Articles of Continuance, with
a view to updating the governance of the Company. This review,
being led by Messrs. Richard McGinity and Myron Kanik, has been
ongoing since May 2004. The review includes all aspects of the
Company's Articles, including but not limited to the Company's Nova
Scotia domicile; share voting restrictions; Board structure,
qualifications, compensation and incentives; shareholder proposals
and related matters. The review is expected to culminate in the
calling of a Special Meeting of the shareholders to consider
specific changes which will be recommended by the Board of
Directors. The Company currently anticipates that the Special
Meeting will be called for in the fourth quarter of 2004. Financial
Results Effective May 1, 2004, the Company converted its 30.67%
carried interest in the Kotaneelee field to a corresponding 30.67%
working interest. Although the conversion has no impact on the
aggregate amounts of the Company's share of field production and
related operating field cash flow, the conversion has financial
statement disclosure implications. Proceeds from carried interests
decreased significantly from 2003 to 2004 and revenue from natural
gas sales increased significantly during the same period. These
changes are due to a combination of production declines and related
sales over the corresponding period of the previous year, and the
impact of conversion of Kotaneelee to a working interest during the
second quarter of 2004. Proceeds from carried interests represent
passive net investment income in a net cash flow stream, and
appropriately are recorded after the reduction of all royalties,
lease operating costs and capital expenditures. The conversion to a
working interest at Kotaneelee and certain of its other properties
represents a fundamental shift by the Company toward direct
management of its oil and gas assets. As the majority of the
Company's carried interest revenue (prior to conversion) related to
Kotaneelee, future carried interest revenue will decrease
significantly. Subsequent to May 1, 2004, sales (net of royalties)
from the Kotaneelee field will be reported as natural gas sales,
and related operating costs for Kotaneelee will be included in
expenses under the caption "lease operating costs". As a result,
natural gas sales and lease operating expenses will increase
significantly over comparable periods. Future capital expenditures
for Kotaneelee will no longer be a deduction from carried interest
revenue but will instead be recorded as capital asset additions on
the Company's balance sheet. Proceeds from carried interests
decreased 53% to $1,470,000 during the second quarter of 2004 from
$3,101,000 in the second quarter of 2003. The decrease is due to a
combination of production declines and related sales over the
corresponding period in the previous year and the impact of
conversion of the Company's Kotaneelee carried interest to a
working interest. Canada Southern's share of carried interest
natural gas sales volumes decreased by 51% during the second
quarter of 2004 from the second quarter of 2003, from 589,076 mcf
to 287,611 mcf respectively. The decrease is due to both production
declines and the conversion of Kotaneelee to a working interest.
Average carried interest natural gas prices declined 16% when
comparing the second quarter of 2004 to the second quarter of 2003.
Natural gas revenue from working and royalty interest properties
increased 112% to $1,597,000 in the second quarter of 2004 from
$752,000 in the second quarter of 2003. There was a 105% increase
in the working interest volumes sold and a 4% increase in the
average sales price of working interest sales. The conversion of
Kotaneelee to a working interest effective May 1, 2004 was a major
component for this increase. Natural gas sales include royalty
income, which increased by 324% from $74,000 to $315,000. Royalty
volumes sold increased by 386% and the natural gas royalty sales
price decreased 13% when compared with the second quarter of 2003.
Natural gas royalty expense was significantly higher in the second
quarter of 2004 at $495,000, or 28% of natural gas working interest
sales, compared to $156,000, or 19% of natural gas working interest
sales, in the second quarter of last year. This was a direct result
of the Kotaneelee royalty expense being including in working
interest royalty expense subsequent to conversion. Prior to
conversion of the Kotaneelee carried interest to a working
interest, the royalty expense for that property was recorded as a
reduction of carried interest gas sales. Oil and natural gas liquid
sales from working and royalty interests increased by 20% in the
second quarter of 2004 to $77,000 compared to $64,000 in the second
quarter of 2003. Interest and other income increased 165% in the
second quarter of 2004 to $499,000 from $188,000 in the second
quarter of 2003. Included in other income in the second quarter of
2004 is $300,000 received in the settlement of an outstanding issue
relating to the carried interest revenues for the Buick Creek,
Wargen and Clarke Lake properties from the year 2000. Although the
quarter ending June 30, 2004 cash balance was higher then the
quarter ended cash balance of 2003, investment yield declined from
2003 to 2004. Thus, excluding the $300,000 settlement, investment
income year over year did not increase over that time. Interest and
other income before the settlement proceeds were 5% higher during
the second quarter of 2004 compared to the second quarter of 2003.
General and administrative costs increased 55% in the second
quarter of 2004 to $997,000 from $639,000 in the second quarter of
2003 primarily because of increases in salaries and benefits,
consultants' expenses and insurance expense. Salaries and benefits
increased 82% due to the addition of a Controller in March 2004 and
a President and Chief Executive Officer in April, 2004.
Consultants' fees were higher in the second quarter of 2004 as a
result of the higher operational activity level compared to the
same time period in 2003. No general and administrative expenses
were capitalized during the period. Legal expenses increased 61%
during the second quarter of 2004 to $126,000 from $79,000 during
the second quarter of 2003. This increase was mainly due to
increased use of legal advisors for the Company's review of
corporate governance issues. Lease operating costs increased 122%
from $197,000 in the second quarter of 2003 to $438,000 in the
second quarter of 2004. The increase was mainly due to the addition
of Kotaneelee lease operating expenses effective May 1, 2004.
Depletion, depreciation and amortization expense increased 71% in
the second quarter of 2004 to $861,000 from $502,000 in the second
quarter of 2003. The increased depletion rate is mainly due to the
capital expenditures incurred during the fourth quarter of 2003 and
the first half of 2004 without, as yet, corresponding increases in
proven reserves. Asset retirement obligations accretion expense
increased by 279% to $60,000 in the second quarter of 2004 compared
with the restated amount of $16,000 in the second quarter of 2003.
The increase is mainly due to the addition of liabilities resulting
from the settlement of the Kotaneelee litigation. In connection
with the settlement, the Company agreed to be responsible for its
share of abandonment and reclamation liabilities at the Kotaneelee
field when they occur. At the time of the settlement, it was
estimated that the Company's 30.67% share of the abandonment
liabilities amounted to approximately $2,400,000 (undiscounted).
Stock option expense increased 23% to $234,000 in the second
quarter of 2004 compared to the restated amount of $190,000 for the
comparable period in 2003 after retroactive adoption of the
Canadian Institute of Chartered Accountant's (CICA) section 3870
(Stock-based Compensation and Other Stock- based Payments." The
increase is due to the number of options issued during the first
six months of this year compared to last year. In 2004, options
have been issued to two new employees and one director, for a total
of 180,000 stock options. During the first six months of 2003, only
50,000 stock options were granted. A foreign exchange gain of
$68,000 was recorded in the second quarter of 2004, compared to a
loss of $233,000 in the second quarter of 2003 on the Company's
U.S. dollar investments. The continued strength of the U.S. dollar
compared to the Canadian dollar during the second quarter of 2004
resulted in the gain. With the relative volatility between the U.S.
and Canadian dollar, the Company expects to record further foreign
exchange losses or gains during the year. The value of the Canadian
dollar was U.S. $.7727 at December 31, 2003 compared to U.S. $.7433
at June 30, 2004. An income tax provision of $550,000 was recorded
in the second quarter of 2004 compared to an income tax provision,
as restated, of $958,000 during the second quarter of 2003. The
Company's quarterly report on Form 10-Q for the period ended June
30, 2004 has been filed today with the U.S. Securities and Exchange
Commission (SEC) and the Canadian Securities Administrators' System
for Electronic Document Analysis and Retrieval (SEDAR). This
document may be obtained at the SEC's website address of
http://www.sec.gov/ or at http://www.sedar.com/. A link to the
Company's SEC and SEDAR filings can also be found on the Company
website address of http://www.cansopet.com/. Canada Southern
Petroleum Ltd. is an independent energy company based in Calgary,
Alberta, Canada. The Company is engaged in oil and gas exploration
and development, with its primary interests in producing properties
in the Yukon Territory and British Columbia, Canada. The Company's
limited voting shares are traded on the NASDAQ SmallCap Market and
the Pacific Exchange, Inc. under the symbol "CSPLF," and on the
Boston Stock Exchange and the Toronto Stock Exchange under the
symbol "CSW." The Company has 14,417,770 shares outstanding. Any
statements in this release that are not historical in nature are
intended to be, and are hereby identified as "forward-looking
statements" for purposes of the "Safe Harbor Statement" under the
Private Securities Litigation Reform Act of 1995. Forward-looking
statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those
indicated in the forward-looking statements. Among these risks and
uncertainties are uncertainties as to the costs, pricing and
production levels from the properties in which the Company has
interests, the extent of the recoverable reserves at those
properties, and the significant costs associated with the
exploration and development of the properties in which the Company
has interests, particularly the Kotaneelee field. The Company
undertakes no obligation to update or revise forward-looking
statements, whether as a result of new information, future events,
or otherwise. The Company does caution, however, that results in
2004 will be significantly lower than in 2003, which were favorably
affected by settlement of the Kotaneelee litigation. Comparative,
unaudited results for the three and six-month periods ended June
30, 2004 and 2003 are shown in the following condensed income
statement, statement of cash flows, and supplementary information
on oil and gas producing activities. Certain figures relating to
the three and six months ended June 30, 2003 have been restated to
incorporate changes resulting from the adoption of certain
accounting policies. All figures are expressed in Canadian dollars.
CANADA SOUTHERN PETROLEUM LTD. CONSOLIDATED STATEMENTS OF
OPERATIONS AND RETAINED EARNINGS (DEFICIT) (Expressed in Canadian
dollars) (unaudited) Three months ended Six months ended June 30,
June 30, 2004 2003 2004 2003 restated restated Revenues: Proceeds
from carried interests $1,469,792 $3,101,497 $3,475,794 $5,978,199
Natural gas sales 1,597,103 751,617 2,711,618 1,784,922 Oil and
liquid sales 76,589 64,047 141,460 163,514 Interest and other
income 498,782 188,411 782,915 321,227 Total revenues 3,642,266
4,105,572 7,111,787 8,247,862 Costs and expenses: General and
administrative 996,739 639,059 1,649,649 1,183,016 Lease operating
costs 437,921 197,097 661,421 679,605 Depletion, depreciation and
amortization 861,000 502,390 1,622,000 1,037,780 Asset retirement
obligations accretion expense 60,000 15,829 120,000 31,658 Stock
option expense 233,700 189,715 267,100 195,490 Foreign exchange
(gain) loss (67,556) 232,909 (95,635) 436,814 Total costs and
expenses 2,521,804 1,776,999 4,224,535 3,564,363 Income before
income taxes 1,120,462 2,328,573 2,887,252 4,683,499 Income taxes
(550,000) (958,387) (1,161,000) (1,999,958) Net Income 570,462
1,370,186 1,726,252 2,683,541 Retained earnings (deficit) -
beginning of period 1,534,161 (15,358,392) 378,371 (16,671,747)
Retained earnings (deficit) - end of period $2,104,623
$(13,988,206) $2,104,623 $(13,988,206) Net income per share: Basic
$0.04 $0.10 $0.12 $0.19 Diluted $0.04 $0.10 $0.12 $0.19 Average
number of shares outstanding: Basic 14,417,770 14,417,770
14,417,770 14,417,770 Diluted 14,420,429 14,417,770 14,419,394
14,417,770 CANADA SOUTHERN PETROLEUM LTD. CONSOLIDATED STATEMENTS
OF CASH FLOWS (Expressed in Canadian dollars) (unaudited) Three
months ended Six months ended June 30, June 30, 2004 2003 2004 2003
restated restated Cash flows from operating activities: Net income
$ 570,462 $1,370,186 $ 1,726,252 $2,683,541 Adjustments to
reconcile net income to net cash provided from (used in) operating
activities: Depletion depreciation, and amortization 861,000
502,390 1,622,000 1,037,780 Future income tax expense (recovery)
(86,000) 958,387 365,000 1,449,958 Asset retirement obligations
accretion expense 60,000 15,829 120,000 31,658 Asset retirement
expenditures (663) (28,671) (880) (165,953) Stock option expense
233,700 189,715 267,100 195,490 Funds provided from operations
1,638,499 3,007,836 4,099,472 5,232,474 Change in current assets
and liabilities: Accounts receivable 1,437,719 464,926 906,422
(493,639) Other assets 147,860 96,176 116,534 143,116 Accounts
payable (223,573) (230,486) (2,068,338) (196,729) Accrued
liabilities 73,250 (195,786) (1,049,937) 1,185,315 Accrued Income
taxes payable 605,003 -- (9,147,300) -- Net cash provided from
(used in) operations 3,678,758 3,142,666 (7,143,147) 5,870,537 Cash
flows used in investing activities: Additions to oil and gas
properties (770,489) (553,496) (2,055,442) (1,092,618) Net cash
used in investing activities (770,489) (553,496) (2,055,442)
(1,092,618) Increase (decrease) in cash and cash equivalents
2,908,269 2,589,170 (9,198,589) 4,777,919 Cash and cash equivalents
at the beginning of period 36,975,528 21,643,202 49,082,386
19,454,453 Cash and cash equivalents at the end of period $
39,883,797 $ 24,232,372 $ 39,883,797 $24,232,372 CANADA SOUTHERN
PETROLEUM LTD. Supplementary Oil and Gas Data (Expressed in
Canadian dollars) (unaudited) Six-month periods ended June 30,
Total Sales Volumes 2004 2003 Change % Change (before royalties)
Carried interests (mcf) 765,147 1,249,075 (483,928) (39%) Carried
interests (bbls) 96 74 22 30% Natural gas (mcf) 581,166 361,601
219,565 61% Oil and liquids (bbls) 5,227 5,377 (150) (3%) boe (6
mcf = 1 boe) 229,709 273,897 (44,188) (16%) boe per day 1,262 1,513
(251) (17%) mcfe (1 bbl = 6 mcfe) 1,378,251 1,643,382 (265,131)
(16%) mcfe per day 7,573 9,079 (1,506) (17%) Sales mix: Natural gas
(mcf) 98% 98% -- 0% Oil and natural gas liquids (mcfe) 2% 2% -- 0%
Netback analysis for carried interest sales: Carried interests (per
mcfe) Sales $5.83 $ 6.36 (.53) (8%) Royalties (.62) (.90) .28 (31%)
Transportation (.37) (.48) .11 (23%) Net Sales 4.84 4.98 (.14) (3%)
Lease operating expenses (.29) (.20) (.09) 45% Carried interest
capital (.01) -- (.01) -- Field netback $4.54 $ 4.78 (.24) (5%)
Netback analysis for working and royalty interest sales: Working
and royalty interests (per mcfe) Sales $5.62 $ 6.48 (.86) (13%)
Royalties (.96) (1.53) .57 (37%) Net Sales 4.66 4.95 (.29) (6%)
Lease operating expenses (1.08) (1.73) .65 (37%) Field netback
$3.58 $ 3.22 .36 11% Definition of Terms boe = barrel of oil
equivalent mcfe = thousand cubic feet equivalent mcf = thousand
cubic feet of natural gas bbl = barrel of oil DATASOURCE: Canada
Southern Petroleum Ltd. CONTACT: Randy Denecky, Chief Financial
Officer, Canada Southern Petroleum Ltd., +1-403-269-7741 Web site:
http://www.cansopet.com/
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