CONSOLIDATED INTERIM FINANCIAL STATEMENTS MARCH 31, 2014
BNK PETROLEUM INC. CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION (Unaudited, expressed in Thousands of United States Dollars) March 31, December 31, Current assets Cash and cash equivalents $ 47,351 $ 17,159 Investments in marketable securities - 25,056 Trade and other receivables 6,653 7,268 Deposits and prepaid expenses 1,353 1,243 55,357 50,726 Non-current assets Long-term receivables 218 433 Investments in joint ventures (Note 10) 3,093 2,787 Property, plant and equipment (Note 4) 98,387 94,663 Exploration and evaluation assets (Note 5) 43,986 36,194 145,684 134,077 Total assets $ 201,041 $ 184,803 Current liabilities Trade and other payables $ 18,120 $ 31,872 18,120 31,872 Non-current liabilities Loans and borrowings 100 100 Asset retirement obligations 1,301 1,192 1,401 1,292 Equity Share capital 276,949 247,782 Contributed surplus 19,185 18,721 Deficit (114,614) (114,864) Total equity 181,520 151,639 Total equity and liabilities $ 201,041 $ 184,803 1
BNK PETROLEUM INC. CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS THREE MONTHS ENDED MARCH 31 (Unaudited, expressed in Thousands of United States Dollars) Revenue Oil and natural gas revenue, net of royalties $ 5,501 $ 4,248 Gathering income - 330 Management fees and other income 202 223 5,703 4,801 Expenses Exploration and evaluation expenditures 100 54 Production and operating expenses 533 1,399 Depletion and depreciation (Notes 4 and 5) 1,808 1,854 General and administrative expenses 2,930 3,466 Share based compensation (Note 8) 335 108 (Gain) loss from investment in joint ventures (Note 10) (291) 23 5,415 6,904 Finance income Realized gain on financial commodity contracts - 244 Foreign exchange gain - 58 Interest and other 19-19 302 Finance expense Unrealized loss on financial commodity contracts - 2,510 Foreign exchange loss 34 - Interest on loans and borrowings 2 994 Loss on investments 9 - Unrealized loss on warrant revaluation - 6 Accretion of asset retirement obligation 12 9 57 3,519 Net loss and comprehensive loss $ 250 $ (5,320) Basic and diluted net loss per share (Note 6) $ 0.00 $ (0.04) See accompanying notes to consolidated interim financial statements. 2
BNK PETROLEUM INC. CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY (Unaudited, expressed in Thousands of United States dollars) Number of common shares Share capital Contributed Surplus Deficit Total Equity Balance at January 1, 2013 144,361,185 $ 247,326 $ 16,663 $ (95,154) $ 168,835 Share based compensation (Note 8) - - 271-271 Net loss for the period - - - (5,320) (5,320) Balance at March 31, 2013 144,361,185 $ 247,326 $ 16,934 $ (100,474) $ 163,786 Balance at January 1, 2014 144,771,202 $247,782 $18,721 $(114,864) $151,639 Prospectus offering (Note 7) 15,910,000 29,063 29,063 Options exercised (Note 8) 75,367 104 (46) 58 Share cancellations (11) - - - - Share based compensation (Note 8) 510-510 Net income for the period - - - 250 250 Balance at March 31, 2014 160,756,558 $ 276,949 $ 19,185 $ (114,614) $ 181,520 See accompanying notes to consolidated interim financial statements. 3
BNK PETROLEUM INC. CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31 (Unaudited, expressed in Thousands of United States Dollars) Cash flows from operating activities Net loss $ 250 $ (5,320) Adjustments for: Depletion and depreciation 1,808 1,854 Accretion of asset retirement obligation 12 9 Loss on investments 9 - Unrealized loss on financial commodity contracts - 2,510 Unrealized loss on warrant revaluation - 6 Share based compensation (Note 8) 335 108 Unrealized foreign exchange gain (36) (36) Amortization of loan acquisition costs - 387 (Gain) loss from equity investments (291) 23 Change in long-term receivable 215 210 Change in non-cash working capital (Note 3) 654 517 Net cash from operating activities 2,956 268 Cash flows from investing activities Additions to property, plant and equipment (5,182) (1,610) Investments in equity investments (205) - Proceeds from sale of investments 25,047 - Additions to exploration and evaluation assets (7,775) (882) Change in non-cash working capital (Note 3) (13,759) (2,773) Net cash from (used in) investing activities (1,874) (5,265) Cash flows from financing activities Proceeds from exercise of share options 58 - Proceeds from loans and borrowings - 37,315 Payments of loans and borrowings - (32,000) Proceeds from equity offering 29,063 - Net cash from financing activities 29,121 5,315 Foreign exchange effect on cash and cash equivalents (11) (54) Change in cash and cash equivalents 30,192 264 Cash and cash equivalents, beginning of period 17,159 2,836 Cash and cash equivalents, end of period $ 47,351 $ 3,100 See accompanying notes to consolidated interim financial statements. 4
For the three months ended March 31, 2014 and 2013 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION BNK Petroleum Inc. (the Company or BNK ), was incorporated under the Business Corporations Act (British Columbia) on May 6, 2008. BNK is an international energy company listed on the Toronto Stock Exchange (TSX). The Company is focused on the acquisition, exploration, and production of oil and gas reserves with a strategic focus on Europe. In the United States, BNK has producing properties concentrated in Oklahoma. These condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting following the same accounting policies and methods of computation as the annual consolidated financial statements of the Company for the year ended December 31, 2013. The disclosures provided below are incremental to those included with the annual consolidated financial statements and certain disclosures, which are normally required to be included in the notes to the annual consolidated financial statements, have been condensed or omitted. These condensed interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company s annual filings for the year ended December 31, 2013. The condensed interim consolidated financial statements were approved by the Company s Board of Directors on May 8, 2014. Changes in Accounting Policies In December 2011, Offsetting Financial Assets and Financial Liabilities, amendments to IAS 32 Financial Instruments: Presentation was published by the IASB. These amendments clarify the requirements for offsetting financial instruments. The amendments introduce new disclosure requirements for financial assets and financial liabilities that are offset in the consolidated statements of financial position, or are subject to enforceable master netting arrangements or similar agreements. The amendments to IAS 32 are applied retrospectively for annual periods beginning on or after January 1, 2014. The adoption of these standards had no impact on the amounts recorded in the financial statements for the periods presented in these consolidated interim financial statements. On January 1, 2014, the Company adopted IFRIC 21 Levies. IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. The interpretation also clarifies that no liability should be recognized before the specified minimum threshold to trigger that levy is reached. The adoption of this standard had no impact on the amounts recorded in the financial statements for the periods presented in these consolidated interim financial statements. 2. FINANCIAL RISK MANAGEMENT Credit Risk The Company s accounts receivable are with customers and joint interest partners in the petroleum and 5
natural gas business and are subject to normal credit risks. The accounts receivable balance at March 31, 2014 includes $1.4 million (December 31, 2013: $1.4 million) from joint interest partners relating to their interest in operating costs and capital spent. Commodity price risk The Company classifies fair value measurements according to the following hierarchy based on the amount of observable inputs used to value the instrument: Level 1 Fair Value Measurements Level 1 fair value measurements are based on unadjusted quoted market prices. Level 2 Fair Value Measurements Level 2 fair value measurements are based on valuation models and techniques where the significant inputs are derived from quoted indices. Level 3 Fair Value Measurements Level 3 fair value measurements are based on unobservable information. The level 3 fair value measurements pertain to the fair value assigned to property and equipment, intangible exploration assets and other intangible assets acquired in business combinations. The Company s cash and cash equivalents and investments in marketable securities are classified as Level 1. 3. SUPPLEMENTAL CASH FLOW INFORMATION Changes in non-cash flow working capital is comprised of: Trade and other receivables $ 710 $ 3,077 Deposits and prepaid expenses (110) 832 Trade and other payables (13,752) (6,267) Foreign currency 47 102 $ (13,105) $ (2,256) Related to operating activities $ 654 $ 517 Related to investing activities $ (13,759) $ (2,773) 6
4. PROPERTY, PLANT AND EQUIPMENT Oil and Natural Gas Interests Processing and Other Equipment Total Cost or deemed cost Balance at January 1, 2013 $ 172,652 $ 1,338 $ 173,990 Additions 78,804 258 79,062 Dispositions (154,792) - (154,792) Balance at December 31, 2013 96,664 1,596 98,260 Additions 5,370 108 5,478 Balance at March 31, 2014 102,034 1,704 103,738 Accumulated depletion and depreciation Balance at January 1, 2013 $ 16,759 $ 682 $ 17,441 Depletion and depreciation for the period 4,295 284 4,579 Dispositions (18,423) - (18,423) Balance at December 31, 2013 2,631 966 3,597 Depletion and depreciation for the period 1,705 49 1,754 Balance at March 31, 2014 4,336 1,015 5,351 Net carrying amounts At December 31, 2013 $ 94,033 $ 630 $ 94,663 At March 31, 2014 97,698 689 98,387 5. EXPLORATION AND EVALUATION ASSETS Total Balance at January 1, 2013 $ 33,590 Additions 4,724 Exploration and evaluation expenses (1,913) Amortization (207) Balance at December 31, 2013 $ 36,194 Additions 7,846 Amortization (54) Balance at March 31, 2014 $ 43,986 7
6. EARNINGS PER SHARE Basic earnings per share Net income (loss) $ 250 $ (5,320) Weighted average number of common shares (basic) 145,699 144,361 Net income (loss) per share basic $ 0.00 $ (0.04) Diluted earnings per share Net income (loss) $ 250 $ (5,320) Effect of outstanding options 6,300 (a) Weighted average number of common shares - diluted 151,999 144,361 Net income (loss) per share diluted $ 0.00 $ (0.04) (a) In 2013, all the options and warrants were anti-dilutive as the Company incurred a net loss. 7. EQUITY OFFERING On March 26, 2014, the Company completed an agreement with a syndicate of underwriters to purchase, on a bought deal basis, 15,910,000 common shares of the Company at C$2.20 per common share. The Company received net proceeds of approximately $29 million as a result of this offering. Subsequent to the end of the quarter, the underwriters exercised an over-allotment option to purchase an additional 900,000 common shares at C$2.20 per share. 8. STOCK OPTIONS The Company has an option program that entitles officers, directors, employees and certain consultants to purchase shares in the Company. Options are granted at the market price of the shares at the date of grant, have a five year term and generally vest over two years. 8
The number and weighted average exercise prices of share options are as follows: Number of options Weighted average exercise price Number of options Weighted average exercise price Outstanding at January 1 11,874,468 $ 1.08 11,438,901 $ 1.68 Exercised during the period (75,367) 0.83 - - Cancelled during the period (66,667) 2.10 (243,333) 2.53 Granted during the period 340,000 2.03 - - Outstanding at March 31 12,072,434 $ 1.10 11,195,568 $ 1.65 Exercisable at March 31 8,551,769 $ 0.98 9,953,903 $ 1.56 Weighted average share price on date of exercise 75,367 $ 1.82 - $ - The range of exercise prices for the outstanding options is as follows: Number of outstanding stock options Weighted average exercise price Weighted average contractual life (years) $4.01 to $4.50 30,000 $ 4.36 2.3 $2.51 to $3.00 103,333 $ 2.85 1.5 $2.01 to $2.50 840,000 $ 2.08 3.1 $1.51 to $2.00 3,086,000 $ 1.75 4.1 $1.01 to $1.50 318,033 $ 1.41 2.9 $0.50 to $1.00 7,695,068 $ 0.68 1.3 12,072,434 $ 1.10 2.2 The fair value of the options was estimated using Black Scholes model with the following weighted average inputs: Fair value at grant date (per option) $ 2.03 $ - Volatility (%) 82.24 - Forfeiture rate (%) 5% - Option life (years) 5 - Risk-free interest rate (%) 1.71-9
Share based compensation was recorded as follows: Three months ended March 31, Expensed $ 335 $ 108 Capitalized $ 175 $ 163 9. COMMITMENTS Poland Generally, the total work commitments under these concessions include, for each concession, geological work, 2D seismic and the drilling of two wells within three years from the date of grant of each concession, unless extended or modified. Slawno, Slupsk, Starogard Concessions The work commitment under the Slupsk concession is comprised of 2D seismic, geological work and 2 vertical wells. In January 2014, Saponis filed a concession modification for a four year extension of its Slupsk concession which has a current deadline of June 2014. The extension is intended to provide Saponis with flexibility as to the timing of completion of these work commitments. In the event that the extension is not granted, Saponis would likely be unable to meet the current work commitments on the concession and would consequently lose the Slupsk concession. Due to higher geological risks, Saponis decided to relinquish the other two concessions, Slawno and Starogard. Bytow and Trzebielino Concessions The Company's indirect wholly-owned subsidiary, Indiana Investments Sp. z o.o., was awarded the Bytow and Trzebielino concessions in the Baltic Basin of Poland in March 2010. The work commitment originally required the spudding of one well on each concession block within the first 18 months from the date of grant of each concession (September 2011) and drilling a second well within the first three years of the date of grant (March 2013). The Company obtained a concession modification from the Polish Ministry of Environment to acquire a larger 2D seismic program and an extension for the time required to drill the first and second well on each concession to September 2012 and March 2015, respectively. Drilling of the wells on the Trzebielino and Bytow concessions began prior to September 2012. On each of these concessions a second well must be drilled prior to March 2015 in order to keep the concession in good standing. Concession modifications have been submitted for both the Trzebielino and Bytow concessions, which requested a four year extension. These modifications, if granted, would extend the drilling date for the second well on each concession to March 2016 and add a third and fourth well to be drilled on each concession by March 2017 and March 2019, respectively. Spain The Sedano and Urraca concession applications outlined the annual work programs in each year of the five year concession term, including the drilling of a total of nine wells on each concession. 10
However, the concession applications stipulated that failure to drill the required wells in the time indicated in the concession applications would not constitute a default of the concession requirements if required permits are not approved by the government in a timely fashion. The Company is required annually to submit a current year work program for each concession. Each work program reflects the progression of the project, including in respect of permitting. The Sedano and Urraca concessions are each in their third year. As a result of permitting delays, the current year work program for each of the Sedano and Urraca concessions is comprised of obtaining drilling permits, progress on communication plan, finalizing drilling programs and beginning site construction of three well locations. A failure to meet work commitments without obtaining an extension or another arrangement may result in the loss of the applicable concession. The Company understands that there may be circumstances in which a failure to meet work commitments could result in liability in respect of the unperformed current year work commitments. 10. INVESTMENT IN JOINT VENTURES The Company has a 57.04% equity interest in Saponis, a joint venture located in Poland. The summarized financial information of Saponis (on a 100% basis) is as follows: March 31, 2014 December 31, 2013 Cash and cash equivalents $ 1,300 $ 1,484 Other current assets 124 148 Non-current assets 10,491 10,121 Current liabilities (517) (516) Non-current liabilities (15,953) (16,219) Net assets at 100% $ (4,555) $ (4,982) Net assets at 57.04% $ - $ - Long-term receivable from Saponis $ 3,093 $ 2,787 Investment in joint ventures (57.04%) $ 3,093 $ 2,787 Investment in Joint Ventures Balance at December 31, 2012 $ 10,114 Net loss from investments in joint ventures (7,533) Additions 206 Balance at December 31, 2013 2,787 Net gain from investments in joint ventures 291 Elimination adjustments (190) Additions 205 Balance at March 31, 2014 $ 3,093 11
Three Months Ended March 31, March 31, Other income $ 1,192 $ 95 Expenses and depreciation (171) (144) Finance expense (income) (511) (36) Net gain (loss) at 100% 510 (85) Gain (Loss) from investment in joint venture 291 (23) 12
11. SEGMENTED INFORMATION The Company defines its reportable segments based on the countries where it conducts business. The countries included in Other are Spain, Germany, France and the Netherlands. Three months ended March 31, 2014 United States Canada Poland Other Total Oil and natural gas revenues, net of royalties $ 5,501 $ - $ - $ - $ 5,501 Management fees and other income 202 - - - 202 5,703 - - - 5,703 Exploration and evaluation expenditures - - - 100 100 Production and operating expenses 533 - - - 533 Depletion and depreciation 1,740-67 1 1,808 General and administrative expenses 1,491 366 374 699 2,930 Share based compensation 251 58 26-335 Gain from investment in joint ventures - - (291) - (291) 4,015 424 176 800 5,415 Finance income 19 - - - 19 Finance expense (16) 253 (141) (153) (57) Net loss $ 1,691 $ (171) $ (317) $ (953) $ 250 Assets $ 114,888 $ 36,100 $ 43,610 $ 6,443 $ 201,041 Capital expenditures $ 5,179 $ - $ 7,660 $ 115 $ 12,954 13
13. SEGMENTED INFORMATION continued Three months ended March 31, 2013 United States Canada Poland Other Total Oil and natural gas revenues, net of royalties $ 4,248 $ - $ - $ - $ 4,248 Gathering income 330 - - - 330 Management fees 223 - - - 223 4,801 - - - 4,801 Exploration and evaluation expenditures - - - 54 54 Production and operating expenses 1,399 - - - 1,399 Depletion and depreciation 1,775-77 2 1,854 General and administrative expenses 1,495 436 631 904 3,466 Share based compensation 63 14 21 10 108 Loss from investment in joint ventures - - 23-23 4,732 450 752 970 6,904 Finance income 244 (9) 102 (35) 302 Finance expense (3,513) (6) - - (3,519) Net loss $ (3,200) $ (465) $ (650) $ (1,005) $ (5,320) Assets $ 166,054 $ 399 $ 40,998 $ 7,545 $ 214,996 Capital expenditures $ 1,600 $ - $ 574 $ 318 $ 2,492 14