CAZA.L Regulatory News (CAZA)

31 Mar 2008 07:02

Caza Oil & Gas, Inc.31 March 2008 NEWS RELEASE TRANSMITTED BY MARKETWIRE FOR: CAZA OIL & GAS, INC. TSX SYMBOL: CAZ AIM SYMBOL: CAZA March 31, 2008 Caza Oil & Gas, Inc.: ANNOUNCES RESULTS FOR THE YEAR ENDED DECEMBER 31,2007 HOUSTON, TEXAS--(Marketwire - March 31, 2008) - Caza Oil & Gas, Inc. ("Caza" or"the Company") (TSX:CAZ)(AIM:CAZA) announces the Company's final results for theyear ended December 31, 2007. Caza has hydrocarbon exploration, development andproduction assets in Texas, New Mexico and Louisiana USA. Highlights of the year include: - Shares admitted to trading on the Toronto Stock Exchange ("TSX") and AIM in December 2007. - Fundraising of approximately US. $ 11.4 million net in initial public offering. - Matthys McMillan #1 well discovered gas and is in production. - Multiple offset development locations identified on Hite Offset Property, Texas. - Oil and gas discovered with the E.W. Brown #1 well on the Thunder Stud Property. Highlights since the year end include: - Jonell Cerny Gas Unit #1 Well, successfully drilled and awaiting pipeline tie-in. - The Mudslide Slim Federal 15 - #1 well successfully drilled and awaiting pipeline tie-in. W. Michael Ford, CEO of Caza, commented: "Caza is a young, growing company and the results from our explorationactivities have added significantly to our asset base and provided continuingopportunities to grow our production, cash flow and net asset value. Caza is planning to embark on a development drilling program on projects inWharton County, Texas and Southeast New Mexico as a result of the success of ourdrilling activities. In addition exploitation operations are scheduled in theWolfberry trend of the Permian Basin along with further exploration activity inTexas. Caza continues to actively evaluate investment opportunities in addition to ouron-going effort to identify opportunities on our existing assets." Copies of the Company's financial statements for the year ended December 31,2007 and the management's discussion and the Annual Information Form for theyear ended December 31, 2007 are available on SEDAR at www.sedar.com. President/CEO Statement I am pleased to report to the shareholders of Caza Oil & Gas, Inc. ("Caza" or"the Company") significant progress, growth and development during the financialyear ended December 31, 2007. During the past year the company has achieved many of its immediate goals. Theseinclude admission to the Toronto Stock Exchange and admission to the AIM, amarket operated by London Stock Exchange plc, on December 12, 2007, which wasaccompanied by an initial public offering fundraising of approximately US. $11.4million net. The Company successfully operated and participated in the drillingof a number of wells, most significant was the Matthys McMillan #1 well in theHite Offset Property which is now on production. We are excited to announce that during 2007 proved + probable reserves increasedby 516% consisting of 17.76 Bcfe at December 31, 2007 as compared to 2.88 Bcfefor the year ending December 31, 2006. Proved Developed Producing reservesduring the same period increased by 228% consisting of 2.53 Bcf at December 31,2007 as compared to 0.77 Bcf for the year ending December 31, 2006. Caza is planning to embark on a development drilling program on projects inWharton County, Texas and Southeast New Mexico. In addition exploitationoperations are scheduled in the Wolfberry trend of the Permian Basin along withfurther exploration activity in Texas. For the year ended December 31, 2007, the Company increased revenues from oiland gas sales by 223% from 2006 to $1.38 million. Caza is reporting a decreasednet loss per share of $0.02 per share (2006 - $0.04 per share). Principal Properties The principal properties held by Caza Petroleum, Inc., a subsidiary of Caza, arelocated in the following areas: a) Texas Gulf Coast; b) South Louisiana; c) Southeast New Mexico; and d) Permian Basin of West Texas. A description of Caza Petroleum's principal properties and prospects in theseareas is set forth below. The description includes disclosure relating to thereserves or resources attributed to individual project and prospect areas byNetherland, Sewell and Associates Inc., independent petroleum engineers, intheir report (the "NSAI Report") which evaluates the reserves of Caza Petroleum,Inc. as at December 31, 2007. The estimates of reserves for individual projectareas may not reflect the same confidence level as estimates of reserves for allproperties, due to the effects of aggregation. Texas Gulf Coast General Caza Petroleum holds interests in approximately 12,100 gross acres (5,298 netacres) in a total of 13 properties and prospects in the Wilcox, Frio, and Yeguatrends located in Wharton, Webb and Duval counties of Texas. In the Wilcox trend, Caza Petroleum targets structural closures at depths ofapproximately 9,500 feet to 18,000 feet. Caza Petroleum's prospects in the Frioand Yegua trends are typically amplitude natural gas plays at depths of between3,500 and 8,500 feet. All of Caza Petroleum's prospects in these properties havebeen generated through 3-D Seismic data, advanced reprocessing and attributeanalysis. The NSAI Report assigned proven, probable and possible net reserves of 50.8 Bcfeto Caza Petroleum's Texas Gulf Coast properties. The properties are all locatedwithin a few miles of the Matthys McMillan well and are located in areas whichare well served by gathering systems. Additionally, the Netherland, Sewell Associates Inc. report dated June 30, 2007has assigned best estimate net prospective resources of 41.4 Bcf to Caza's LasAnimas prospect. As of December 31, 2007 Caza Petroleum was producing an average of 822 Mcfe/dnet from its 3 gross (0.76 net wells) producing wells in this region. Caza Petroleum's principal Texas Gulf Coast properties and prospects aredescribed below. Hite Offset Property The Hite Offset property is located in the Wharton West Wilcox Field in thesouth central part of Wharton County, Texas. Caza Petroleum has interests inapproximately 1,149 gross acres (225 net acres) and a 19.6% working interest(14.4% net revenue interest) in this property. During 2007, Caza Petroleum, as operator, drilled the Matthys McMillan #1 wellto a depth of 17,700 feet. The well was completed in the upper Wilcox formationand, as of December 31, 2007, was producing 722 mcfe/d net to Caza Petroleum. Wilcox 116 Property The Jonell Cerny Gas Unit #1 Well, was drilled to test the Wilcox 116 propertywhich is located approximately 3 miles to the southwest of and on trend with theaccumulation found by the Matthys McMillan #1 well. In February 2008, CazaPetroleum entered into two separate farmout agreements with Singular Oil & GasSands, LLC ("Singular") and Sojitz Gulf Exploration, Inc. ("Sojitz") on theWilcox 116 Property in South Texas. Singular and Sojitz each acquired a 10.00%interest on a promoted basis. The transactions combined to reduced CazaPetroleum's working interest in the property from a 47.8% after completionworking interest to a 29.9% working interest (which reduces to a 27.8% workinginterest after completion of the initial well) and a corresponding 20.9% netrevenue interest. Drilling operations commenced on January 15, 2008 and reached a total depth of16,510 feet on March 3, 2008. Analysis of the log data indicates the wellencountered Wilcox Sand pay at multiple intervals from 13,500 feet to 16,400feet. Completion operations are planned to commence in April, following pipelineconnection into the gathering system. Caza anticipates, depending on wellperformance, several additional development locations. Puku Property Caza Petroleum holds approximately 218.4 gross acres (76.4 net acres) and a 35%working interest (26.5% net revenue interest) in this property. A well isanticipated within 12 months for this property. The property targets an attic gas accumulation that was penetrated by acommercially productive offsetting well. Eland and Sable Properties The Eland and Sable properties are located approximately one mile east of thePuku properties. Caza Petroleum holds an aggregate of approximately 362 grossacres (127 net acres) in the properties and a 35% working interest (25.1% netrevenue interest) in each property. A well to test the properties is beingplanned for the second quarter of 2008. The property targets an upthrown threeway high side closure in the FrioFormation. Las Animas Prospect The Las Animas prospect is located in Duval County, Texas. Caza Petroleum hasleasehold interests in approximately 5,980 gross acres (2,567 net acres) in theprospect area made up of gross working interests ranging from 100% to 28% (withcorresponding gross net revenue interests of 80% to 75%) in various tractswhich, in conjunction with various agreements, results in a weighted average42.8% working interest (30.0% net revenue interest) in this prospect. A well isanticipated within 12 months for this property. The prospect targets two upthrown threeway high side closures in the UpperWilcox Duval Complex. One is estimated to be 5,000 acres at the primaryobjective Upper Wilcox sand interval and the other is estimated to be 1,500acres, both at depths of 14,000 to 18,000 feet. South Louisiana General Caza Petroleum holds interests in approximately 4,100 gross acres (410 netacres) covering two properties in trends located in Calcasieu and TerrebonneParish, Louisiana. The Dulac Field property is located in Terrebonne Parish andthe Thunder Stud property is located in Calcasieu Parish. Following furtherevaluation Caza Petroleum does not intend to maintain its lease position on theAlligator Property. Caza Petroleum's prospects in south Louisiana are predominantly focused on theHackberry, Yegua and Middle Miocene trends. The Hackberry trend is typicallylocated at depths between 8,500 and 10,000 feet. The Yegua and Middle Miocenestructural and stratigraphic plays are at depths between 9,000 and 20,000 feet.All of Caza Petroleum's prospects in these properties have been generatedthrough 3-D Seismic data, advanced reprocessing and attribute analysis. Proven, probable and possible net reserves of 14.5 Bcfe have been assigned toCaza Petroleum's south Louisiana properties in the NSAI Report. As of December31, 2007 Caza Petroleum was producing 235 Mcfe/d net from one gross (0.06 net)well in this region. All of Caza's south Louisiana properties are located inareas which are well served by gathering systems. Caza Petroleum's principal Louisiana properties are described below. Dulac Field Property The Dulac Field property is located in Terrebonne Parish, Louisiana. CazaPetroleum holds approximately 200 gross acres (17 net acres) and an approximate8.2% working interest (5.9% net revenue interest) in this property. In July 2006, Falcon Bay, as operator, drilled the State Lease 18582 #1 well asan exploratory test well to a depth of 14,118 feet. The well was completed inthe middle Miocene Eggerella sand and, as of December 31, 2007, was producing235 Mcfe/d net to Caza Petroleum. Thunder Stud Property The Thunder Stud property is located in the southwest corner of CalcasieuParish, Louisiana. Caza Petroleum holds a 10.0% non operated working interest(7.2% net revenue interest) in approximately 3,900 gross acres (390 net acres)subject to a back in after project payout reduction of 37.5%. Caza Petroleum participated in the drilling of the E.W. Brown # 1 well on thisproperty targeting the Yegua formation in the Phoenix Lake Field. This wellreached a total depth of 17,905 feet on May 3, 2007. The E.W. Brown # 1 well encountered both oil & gas potential from multipleintervals between 13,500 feet to 16,300. Caza Petroleum, as a non-operator,anticipates that an appraisal program will be undertaken, subject to partner andother approvals. Southeast New Mexico General Caza Petroleum has interests in approximately 4,200 gross acres (1,700 netacres) in four properties in Southeast New Mexico. After further evaluation,Caza Petroleum elected not to participate in the drilling of the NorthwestRaptor Property. Caza Petroleum's properties target primarily Pennsylvanian Clastics formationsconsisting of lowstand gas and condensate bearing marine deltaic sandstonereservoirs in the Atoka Morrow formations at depths ranging from 8,000 feet to15,000 feet and Permian oil objectives at depths ranging from 2,000 to 8,500feet. Caza Petroleum's land holdings in Southeast New Mexico are a combination ofstate and federal leases and limited fee lands. The state and federaljurisdictions hold periodic auctions for lease which provide the opportunity forCaza Petroleum to acquire additional land positions over time. Leases forfederal lands have a 10 year term while state leases have a five year term. NSAI has assigned probable net reserves of 3.8 Bcfe to Caza Petroleum's interestin its Southeast New Mexico prospects in the NSAI Report. All of theseproperties are located in areas which are well served by gathering systems. Caza has applied for drilling permits on all its New Mexico Properties. Lynch Property The Mudslide Slim Federal 15-1 well, located in Lea County, New Mexico, wasdrilled to test the Lynch (Morrow) Prospect. Caza Petroleum has earned a 40.0%working interest (31.3% net revenue interest) before payout which reduces to a27.8% working interest (20.9% net revenue interest) after payout of the initialwell in this property. Caza Petroleum holds approximately 320 gross acres 128net acres. Drilling operations were commenced on January 13, 2008 and reached a total depthof 13,513 feet on March 2, 2008. Analysis of log data indicates the wellencountered Morrow Sand Pay at multiple intervals from 13,040 feet to 13,160feet. Completion operations are planned to commence in May pending a pipelineconnection into the gathering system. China Draw Property The China Draw property is located in Eddy County. Caza Petroleum holdsapproximately 1,740 gross acres (580 net acres) and a 33.3% working interest(28.2% net revenue interest) in this property. Forehand Ranch Property The Forehand Ranch property is located in Eddy County. Caza Petroleum holdsapproximately 800 gross acres (350 net acres) and a weighted average 43.3%working interest (36.6% net revenue interest) in this property. Azotea Mesa Property The Azotea Mesa property is located in Eddy County. Caza Petroleum holds 1,280gross acres (640 net acres) and a 50.0% working interest (42.3% net revenueinterest) in this property. Permian Basin of West Texas General Caza Petroleum has interests in approximately 11,500 gross acres (3,700 netacres) in the Permian Basin of West Texas located in Crane, Upton and Suttoncounties. These properties target the Spraberry/Wolfcamp formation at depths of 8,000 to10,000 feet and the Canyon Sands formation at depths of 6,500 to 9,000 feet. NSAI has assigned proven, probable and possible net reserves of 3.9 Bcfe to CazaPetroleum's interest in its Permian Basin properties. Caza Petroleum iscurrently producing 80 Mcf/d net from three gross (1.9 net) producing wellslocated in this region. All of Caza's Permian Basin of West Texas properties are located in areas whichare well served by gathering systems. Caza Petroleum's principal Permian Basin of West Texas properties are describedbelow. Glass Ranch Property The Glass Ranch property is located in Crane and Upton counties. Caza Petroleumholds approximately 890 gross acres (330 net acres) and a weighted average 37.6%working interest (28.2% net revenue interest) in this property. It isanticipated that Caza will participate in several wells on this property in2008. Glass Ranch 2 Property The Glass Ranch 2 property is recently acquired acreage and is located in Craneand Upton counties. Caza Petroleum holds approximately 314 gross acres (314 netacres) and a 100% working interest (75% net revenue interest) in this property. The property targets the Spraberry/Wolfcamp formation. Aldwell Ranch Property The Aldwell Ranch property is located in the southwest part of Sutton County,Texas. Caza Petroleum holds 5,000 gross (2,500 net) acres of farmout acreage inthis property and a 50.0% working interest before completion and 45.5% workinginterest after completion (34.1% net revenue interest) in the north block whichhas been partially developed and approximately 5,500 gross (520 net) acres and a9.4% working interest (7.5% net revenue interest) of undeveloped land in thesouthern block. It is anticipated that Caza will participate in an underbalanced well on this property in 2008. Caza Petroleum is currently producing 80.0 Mcf/d net from three gross (1.9 net)producing wells located in the area. The property targets the Canyon Sands formation. Health and Safety Caza as the operator of 90% of its properties have adopted and maintain highenvironmental standards and safety programs. In addition, environmentallysympathetic methods of drilling and production are employed. Conclusion and the Future In Summary, Caza is a young, growing company with strong news flow expected fromour operations in the US. The results from our continuing drilling, development program have addedsignificantly to our asset and reserve base. In 2007 our average production wasincreased by 180% resulting in revenues from oil and gas sales increasing 223%from 2006. Our substantial investments in key projects are beginning to bear fruit; inaddition, we have a growing prospect inventory resulting from our geological andgeophysical efforts. Caza is also very active in evaluating potential deals, some of which Ianticipate will be finalized in 2008. I would like to take this opportunity to thank our shareholders, my fellowdirectors and management, and our advisers in the US, Canada and the UK fortheir collective efforts in making 2007 an extremely successful year for Caza. W. Michael Ford CEO/President March 28, 2008 In accordance with AIM Rules - Guidance Note for Mining, Oil and Gas Companies,the information contained in this announcement constituting a resource ordrilling update has been reviewed and approved by Anthony B. Sam, Vice PresidentOperations of Caza who is a Petroleum Engineer and a member of the Society ofPetroleum Engineers. The reserves data set out in this announcement have been extracted from theCompany's Annual Information Form (available on SEDAR at www.sedar.com). Theevaluation of the reserves data included in the Annual Information Form wascarried out in accordance with standards set out in the Canadian Oil and GasEvaluation Handbook prepared jointly by the Society of Petroleum Engineers(Calgary Chapter) and the Canadian Institute of Mining, Metallurgy & Petroleum(Petroleum Society). Certain key terms used in the Annual Information Forum andthis announcement are set out below: bbl one barrel, each barrel representing 34.972 Imperial gallons or 42 U.S. gallons Bcf billion cubic feet Bcfe billion cubic feet equivalent boe barrels of crude oil equivalent derived by converting natural gas to crude oil in the ratio of six thousand cubic feet of natural gas to one barrel of crude oil Mcf one thousand cubic feet Mcf/d one thousand cubic feet per day Mcfe one thousand of cubic feet of natural gas equivalent derived by converting crude oil to natural gas in the ratio of one barrel of oil into six thousand cubic feet of natural gas Mcfe/d one thousand of cubic feet of natural gas equivalent per day Boe or Mcfe may be misleading, particularly if used in isolation. A boeconversion of 6 Mcf: 1 bbl or a Mcfe conversion ratio of 1 bbl : 6 Mcf is basedon an energy equivalency conversion method primarily applicable at the burnertip and does not represent a value equivalency at the well head. ADVISORY REGARDING FORWARD-LOOKING STATEMENTS - In the interests of providingCaza shareholders and potential investors with information regarding Caza,including management's assessment of Caza's and its subsidiaries' future plansand operations, certain statements contained in this news release areforward-looking statements or information within the meaning of applicablesecurities legislation, collectively referred to herein as "forward-lookingstatements". Forward-looking statements in this news release include, but arenot limited to: future economic and operating performance (including per sharegrowth, cash flow and increase in net asset value); future drilling costs;anticipated growth and success of resource plays and the expectedcharacteristics of resource plays; free cash flow which may be generated in 2008and beyond, and potential uses for such free cash flow; anticipated productionand sales of oil, natural gas and NGLs in 2008; anticipated impact and successof Caza's price hedging strategy, if any; anticipated costs; anticipated pricesfor oil and natural gas; anticipated capital investment in 2008 and theallocation thereof; anticipated capital inflation; anticipated capital andoperating cost efficiencies; anticipated growth in hydrocarbon production;forecast cash flow for 2008 and the anticipated ability to meet guidancetargets. Readers are cautioned not to place undue reliance on forward-looking statements,as there can be no assurance that the plans, intentions or expectations uponwhich they are based will occur. By their nature, forward-looking statementsinvolve numerous assumptions, known and unknown risks and uncertainties, bothgeneral and specific, that contribute to the possibility that the predictions,forecasts, projections and other forward-looking statements will not occur,which may cause the company's actual performance and financial results in futureperiods to differ materially from any estimates or projections of futureperformance or results expressed or implied by such forward-looking statements.These risks and uncertainties include, among other things: volatility of andassumptions regarding oil and gas prices; assumptions based upon the company'scurrent guidance; fluctuations in currency exchange and interest rates; productsupply and demand; market competition; risks inherent in the company's marketingoperations, including credit risks; imprecision of reserve estimates andestimates of recoverable quantities of oil, natural gas and liquids fromresource plays and other sources not currently classified as proved; thecompany's ability to replace and expand oil and gas reserves; the company'sability to generate sufficient cash flow from operations to meet its current andfuture obligations; the company's ability to access external sources of debt andequity capital; the timing and the costs of well and pipeline construction;blowouts, fires, explosions and other sudden emergencies; drilling difficulties,such as lost circulation; the company's ability to secure adequate producttransportation; changes in royalty, tax, environmental and other laws orregulations or the interpretations of such laws or regulations; the risk ofterrorist threats; risks associated with future lawsuits and regulatory actionsmade against the company; and other risks and uncertainties described from timeto time in the reports and filings made with securities regulatory authoritiesby Caza. Although Caza believes that the expectations represented by such forward-lookingstatements are reasonable, there can be no assurance that such expectations willprove to be correct. Readers are cautioned that the foregoing list of importantfactors is not exhaustive. Furthermore, the forward-looking statements containedin this news release are made as of the date of this news release, and, exceptas required by law or regulation, Caza does not undertake any obligation toupdate publicly or to revise any of the included forward-looking statements,whether as a result of new information, future events or otherwise. Theforward-looking statements contained in this news release are expresslyqualified by this cautionary statement. Financial outlook information contained in this press release about prospectiveresults of operations, financial position or cash flows is based on assumptionsabout future events, including economic conditions and proposed courses ofaction, based on management's assessment of the relevant information currentlyavailable. Readers are cautioned that such financial outlook informationcontained in this press release should not be used for purposes other than forwhich it is disclosed herein. Auditors' Report To the Shareholders of Caza Oil & Gas, Inc. We have audited the consolidated balance sheets of Caza Oil & Gas, Inc. as atDecember 31, 2007 and 2006, the consolidated statements of Net Loss andComprehensive Income (Loss), and Retained Earnings (Deficit) and cash flows forthe years then ended. These financial statements are the responsibility of theCompany's management. Our responsibility is to express an opinion on thesefinancial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditingstandards. Those standards require that we plan and perform an audit to obtainreasonable assurance whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in allmaterial respects, the financial position of the Company as at December 31, 2007and 2006 and the results of its operations and its cash flows for the years thenended, in accordance with Canadian generally accepted accounting principles. (signed) "Deloitte & Touche LLP" Chartered Accountants Calgary, Canada March 7, 2008 ------------------------------------------------------------------------- Caza Oil & Gas, Inc. Consolidated Balance Sheets December 31, December 31, (In Thousands of United States dollars) 2007 2006 ------------------------------------------------------------------------- Assets Current Cash and cash equivalents $ 13,195 $ 13,697 Accounts receivable 3,271 2,155 Prepaid and other 334 123 ------------ ------------ 16,800 15,975 Petroleum and equipment (Note 3) 20,354 8,243 Future income tax asset (Note 5) 426 - ------------ ------------ $ 37,580 $ 24,218 ------------ ------------ Liabilities Current Accounts payable and accrued liabilities $ 6,877 $ 4,171 Asset retirement obligations (Note 4) 286 56 Future income taxes (Note 5) - 221 ------------ ------------ 286 277 Shareholders' Equity Share capital (Note 6) 30,811 18,923 Contributed surplus (Note 6(h)) 2,787 2,250 Deficit (3,181) (1,403) ------------ ------------ ------------ ------------ 30,703 20,047 ------------ ------------ ------------ ------------ $ 37,580 $ 24,218 ------------ ------------ See accompanying notes to the consolidated financial statements ------------------------------------------------------------------------- Caza Oil & Gas, Inc. Consolidated Statements of Net Loss and Comprehensive Income (Loss), and Retained Earnings (Deficit) For the Years Ended (In Thousands of United States dollars, December 31, December 31, except per share amounts) 2007 2006 ------------------------------------------------------------------------- Revenues Petroleum and natural gas $ 1,380 $ 427 Other income - 240 Interest income 455 192 ------------ ------------ 1,835 859 ------------ ------------ ------------ ------------ Expenses Production 464 129 General and administrative 3,204 3,217 Depletion, depreciation, amortization and accretion 521 121 Interest 37 29 ------------ ------------ ------------ ------------ 4,226 3,496 ------------ ------------ ------------ ------------ Loss before income taxes (2,391) (2,637) ------------ ------------ Income taxes (Note 5) Current income taxes 30 18 Future income taxes (643) (87) ------------ ------------ (613) (69) ------------ ------------ Net loss and comprehensive loss for the year (1,778) (2,568) Retained Earnings (Deficit), beginning of year (1,403) 2,794 Amount ascribed to exchangeable share rights on acquisition of Caza petroleum (Note 6) - (970) Future income taxes recognized on acquisition of Caza Petroleum (Note 5) - (308) Distributions - (351) ------------ ------------ Deficit, end of year $ (3,181) $ (1,403) ------------ ------------ Net loss per share - basic and diluted (0.02) $ (0.04) ------------ ------------ Weighted average shares outstanding - basic and diluted (1) 75,003,890 67,950,466 ------------ ------------ (1) The options and warrants have been excluded from the diluted loss per share computation as they are anti-dilutive See accompanying notes to the consolidated financial statements ------------------------------------------------------------------------- Caza Oil & Gas, Inc. Consolidated Statements of Cash Flows For the Years Ended December 31, December 31, (In Thousands of United States dollars) 2007 2006 ------------------------------------------------------------------------- CASH FLOWS RELATED TO THE FOLLOWING ACTIVITIES: OPERATING Net loss for the year (1,778) (2,568) Adjustments for items not affecting cash: Depletion, depreciation, amortization and accretion 521 121 Stock-based compensation 364 2,250 Future income taxes recognized on acquisition of Caza Petroleum - (308) Future income tax expense (recovery) (647) 221 Changes in non-cash working capital (Note 9(a)) (760) 165 ---------- ------------ Cash flow from (used in) operating activities (2,300) (119) ---------- ------------ FINANCING Distributions - (351) Proceeds from issuance of shares, net of issue costs 11,888 17,953 Increase in notes payable - 280 Repayment of notes payable - (397) Changes in non-cash working capital (Note 9(a)) 837 - ---------- ------------ Cash flow from financing activities 12,725 17,485 ---------- ------------ INVESTING Exploration and development expenditures (11,734) (5,175) Purchase of equipment (495) (24) Changes in non-cash working capital (Note 9(a)) 1,302 1,328 ---------- ------------ Cash flow (used in) investing activities (10,927) (3,871) ---------- ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (502) 13,945 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 13,697 202 ---------- ------------ CASH AND CASH EQUIVALENTS, END OF YEAR 13,195 13,697 ---------- ------------ Supplementary information (Note 9) See accompanying notes to the consolidated financial statements 1. Basis of Presentation Caza Oil & Gas, Inc. ("Caza" or the "Company") was incorporated under the lawsof British Columbia on June 9, 2006 for the purposes of acquiring shares of CazaPetroleum, Inc. ("Caza Petroleum"). The Company and its subsidiaries are engagedin the exploration for and the development, production and acquisition of,petroleum and natural gas reserves. On December 12, 2007 the Company's shareswere listed for trading on the TSX and AIM markets. Caza owns 71% of the outstanding common shares of Caza Petroleum. The remaininginterest in Caza Petroleum is held by senior management of Caza and may beexchanged for common shares pursuant to a Share Exchange and ShareholdersAgreement (see Note 6(e)). Caza Petroleum was amalgamated with Falcon BayEnergy, LLC ("Falcon Bay") on September 14, 2006. As all of the entities (Caza, Caza Petroleum and Falcon Bay) were under commoncontrol, these consolidated financial statements of Caza and its subsidiarieshave been presented on a continuity-of-interest basis of accounting andrepresent the activities of all of the above noted entities from the date thateach of them commenced operations. The Company's consolidated financialstatements presented for comparative purposes reflect the financial position,results of operations and cash flows as if Caza had been consolidated with CazaPetroleum and Falcon Bay since inception. Caza's reporting currency is the United States ("US") dollar as the majority ofits transactions are denominated in the currency. 2. Significant Accounting Policies The consolidated financial statements of the Company have been prepared bymanagement in accordance with Canadian generally accepted accounting principles.The preparation of financial statements in conformity with Canadian generallyaccepted accounting principles requires management to make estimates andassumptions that affect the amounts reported in these consolidated financialstatements and accompanying notes. Actual results could differ from thoseestimates. These consolidated financial statements have, in management'sopinion, been properly prepared using careful judgement with reasonable limitsof materiality and within the framework of the significant accounting policiessummarized below: Basis of consolidation The consolidated financial statements include those of the Caza, Caza Petroleum,and Caza Petroleum's wholly owned subsidiaries Caza Operating, LLC, Falcon BaySutton County, LLC and Falcon Bay Operating, LLC. All material inter-companytransactions have been eliminated. (b) Financial instruments As of January 1, 2007, Caza adopted the Canadian Institute of CharteredAccountants ("CICA") Section 3855 "Financial Instruments - Recognition andMeasurement;" Section 3861, "Financial Instruments - Disclosure andPresentation" and Section 3865 "Hedges." CICA Section 3855 prescribes when a financial instrument is to be recognized onthe balance sheet and at what amount. It also specifies how financial instrumentgains and losses are to be presented. All financial instruments are classifiedinto one of the following five categories: held for trading, held-to-maturity,loans and receivables, available-for-sale financial assets, or other financialliabilities. Initial and subsequent measurement and recognition of changes inthe value of financial instruments depends on their initial classification: - Held-to-maturity investments, loans and receivables, and other financialliabilities are initially measured at fair value and subsequently measured atamortized cost. Amortization of premiums or discounts and losses due toimpairment are included in current period net earnings. - Available-for-sale financial assets are measured at fair value. Revaluationgains and losses are included in other comprehensive income until the asset isremoved from the balance sheet. - Held for trading financial instruments are measured at fair value. All gainsand losses are included in net earnings in the period in which they arise. - All derivative financial instruments are classified as held for tradingfinancial instruments and are measured at fair value, even when they are part ofa hedging relationship. All gains and losses are included in net earnings in theperiod in which they arise. The financial instruments recognized on Caza's balance sheet were deemed toapproximate their estimated fair values, and therefore no further adjustmentswere required upon adoption of the new sections on January 1, 2007. There wereno financial assets on the balance sheet which were designated asheld-for-trading or available-for-sale. All financial assets were classified asloans or receivables and are accounted for on an amortized cost basis, and allfinancial liabilities were classified as other liabilities on January 1, 2007.There have been no changes to these classifications at December 31, 2007. Thefair values of these financial instruments are the same as their carryingvalues. All transaction costs will be expensed. CICA Section 3865 provides alternative treatments to Section 3855 for entitieswhich choose to designate qualifying transactions as hedges for accountingpurposes. It replaces and expands on Accounting Guideline 13 "HedgingRelationships", and the hedging guidance in Section 1650 "Foreign CurrencyTranslation" by specifying how hedge accounting is applied and what disclosuresare necessary when it is applied. Caza did not have any hedges during 2007. (c) Comprehensive income On January 1, 2007, Caza adopted CICA Section 1530 which introduces a newrequirement to temporarily present certain gains and losses from changes in fairvalue outside net income. It includes unrealized gains and losses, such as:changes in the currency translation adjustment relating to self-sustainingforeign operations; unrealized gains or losses on available-for-saleinvestments; and the effective portion of gains or losses on derivativesdesignated as cash flow hedges. The application of this revised standard did notresult in comprehensive income (loss) being different from the net loss for theperiods presented. (d) Cash and cash equivalents Cash and short-term investments consists of cash on deposit and money marketinstruments that are highly liquid having a maturity date of not more thanninety days at the time of purchase. (e) Joint venture operations Substantially all of the Company's petroleum and natural gas explorationactivities are conducted jointly with others. These consolidated financialstatements reflect only the Company's proportionate interest in such activities. (f) Property and equipment The Company follows the full cost method of accounting for oil and natural gasoperations whereby all costs relating to the acquisition, exploration anddevelopment of oil and natural gas reserves are initially capitalized into asingle United States cost centre. Such costs include land acquisition costs,geological and geophysical expenses, carrying charges on non-producingproperties, costs of drilling both productive and non-productive wells, relatedproduction equipment costs, asset retirement and abandonment costs and overheadcharges directly related to acquisition, exploration and development activities. Capitalized costs, excluding costs related to unproven properties, are depletedand depreciated using the unit-of-production method based on estimated provenoil and natural gas reserves before deduction of royalties as determined byindependent petroleum engineers. Petroleum and natural gas reserves andproduction are converted to thousand cubic feet of gas equivalent using a ratioof one barrel of oil to six thousand cubic feet of natural gas. Costs of acquiring and evaluating unproved properties are initially excludedfrom depletion calculations. These unevaluated properties are assessedperiodically to ascertain whether impairment has occurred. When proved reservesare assigned or the property is considered to be impaired, the cost of theproperty or the amount of the impairment is added to costs subject to depletion. Proceeds from the sale of petroleum and natural gas properties will be appliedagainst capitalized costs, with no gain or loss recognized, unless such a salewould result in a greater than 20% change in the depletion and depreciationrate. A limit is placed on the carrying value of the net capitalized costs in eachcost centre in order to test impairment. The Company is required to perform thisimpairment test at least annually. An impairment loss exists when the carryingvalue of a cost centre exceeds the estimated undiscounted future net cash flowsassociated with the cost centre's proved reserves. If an impairment loss isdetermined to exist, the costs carried on the balance sheet in excess of thediscounted future net cash flows associated with the cost centre's proved plusprobable reserves are charged to income. The Company did not incur an impairmentloss in 2007. Reserves are determined pursuant to the Canadian SecuritiesAdministrators' National Instrument 51-101 "Standard of Disclosure for Oil andGas Activities". Office equipment and furniture is carried at cost and depreciated on a straightline basis over the estimated service lives of five to seven years. (g) Revenue recognition Revenue from the sale of oil, gas and liquids is recognized based on volumedelivered at contractual delivery points and rates. The costs associated withthe delivery, including operating and transportation expenses, are recognized inthe same period in which the related revenue is earned and recorded. (h) Future income taxes The Company follows the tax liability method of accounting for income taxes.Under this method, future tax assets and liabilities are determined based ondifferences between the carrying value and the tax basis of assets andliabilities, and measured using the substantively enacted tax rates and lawsexpected to be in effect when the differences are expected to reverse. Theeffect on future tax assets and liabilities of a change in tax rates isrecognized in income in the period in which the change is substantively enacted.Future income tax assets are only recognized to the extent it is more likelythan not that sufficient future taxable income will be available to allow thefuture income tax asset to be realized. (i) Asset retirement obligation The Company recognizes the fair value of a liability for an asset retirementobligation in the period in which it is incurred or when a reasonable estimateof the fair value can be made, and records a corresponding increase in thecarrying value of the related long-lived asset. The fair value is determinedthrough a review of engineering studies, industry guidelines, and management'sestimate on a site-by-site basis. The liability is subsequently adjusted for thepassage of time, which is recognized as an accretion expense in the consolidatedstatement of net loss. The liability is also adjusted due to revisions in eitherthe timing or the amount of the original estimated cash flows associated withthe liability. Actual costs incurred upon settlement of the asset retirementobligations are charged against the asset retirement obligation to the extent ofthe liability recorded. (j) Foreign currency translation The Company translates foreign currency denominated monetary assets andliabilities at the exchange rate in effect at the balance sheet date andnon-monetary assets and liabilities are translated at historical exchange rates.Revenues and expenses are translated at transaction date exchange rates exceptdepletion and depreciation expense, which is translated at the same historicalexchange rate as the related assets. Exchange gains or losses are included inthe determination of net income as foreign exchange loss. (k) Stock-based compensation The Company accounts for stock-based compensation using the fair-value method ofaccounting for stock options issued to directors, officers and employees usingthe Black-Scholes option-pricing model. Under this method, the compensationcosts attributed to the stock options are measured at the time of grant orissuance and amortized over the vesting period with a corresponding increase tocontributed surplus. When stock options are exercised, the associated amountspreviously recorded as contributed surplus are reclassified to common sharecapital. The Company does not incorporate an estimated forfeiture rate for stockoptions that will not vest but instead accounts for forfeitures as a change inestimate in the period in which they occur. (l) Per share information Basic per share amounts are calculated using the total weighted average numberof common shares outstanding during the period. Shares outstanding also includecommon shares issuable upon exchange of Caza Petroleum shares (See Note 6(e)).Diluted per share calculations reflect the exercise or conversion of potentiallydilutive securities or other contracts to issue shares at the later of the dateof grant of such securities or the beginning of the period. The Company computesdiluted earnings per share using the treasury stock method to determine thedilutive effect of securities or other contracts. Under this method, the dilutedweighted average number of shares is calculated assuming the proceeds that arisefrom the exercise of outstanding, in-the-money options are used to purchasecommon shares of the Company at their average market price for the period. Noadjustment to diluted earnings per share or diluted shares outstanding is madeif the result of the calculations is anti-dilutive. (m) Measurement uncertainty The operations of the Company are complex, and regulations and legislationaffecting the Company are continually changing. Although the ultimate impact ofthese matters on the net income or loss cannot be determined at this time, itcould be material for any one quarter or year. Management makes estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements, and revenues and expenses during the reporting period.Actual results can differ from those estimates. Recorded amounts for depletion and depreciation of petroleum and natural gasproperties and equipment are based on estimates of oil and natural gas reserves.The ceiling test and impairment calculations are based on estimates of oil andnatural gas reserves, future costs required to develop those reserves and thefair value of unproved properties. By their nature, these estimates of reservesand the related future cash flows are subject to measurement uncertainty, andthe effect on the consolidated financial statements of future periods could besignificant. The value of the asset retirement obligation depends on estimates of currentmarket interest rates, future restoration and reclamation expenditures and thetiming of expenditures. By their nature, these estimates are subject tomeasurement uncertainty and the effect on the consolidated financial statementsof changes of estimates in future periods could be significant. The consolidated financial statements include accruals based on the terms ofexisting joint venture agreements. Due to varying interpretations of thedefinition of terms in these agreements the accruals made by management in thisregard may be significantly different from those determined by the Company'sjoint venture partners. The Black-Scholes option pricing model was developed for use in estimating thefair value of traded options which have no vesting restrictions and are fullytransferable. In addition, option pricing models require the input of highlysubjective assumptions including the expected stock price volatility. Becausethe Company's employee's stock options have characteristics significantlydifferent from those of traded options, and because changes in the subjectiveinput assumptions can materially affect the fair value estimate, in management'sopinion, the existing models do not necessarily provide a reliable singlemeasure of the fair value of its employee stock options. By their nature, theseestimates are subject to measurement uncertainty and the effect on theconsolidated financial statements of changes of estimates in future periodscould be significant. The amounts recorded for the utilization of future tax assets subject to anexpiry date are based on estimates of future cash flows and profitability. Bytheir nature, these estimates are subject to measurement uncertainty and theeffect on the consolidated financial statements of changes of estimates infuture periods could be significant. (n) Accounting Changes On January 1, 2007, Caza adopted CICA Section 1506, "Accounting Changes,"provides expanded disclosures for changes in accounting policies, accountingestimates and corrections of errors. Under the new standard, accounting changesshould be applied retrospectively unless otherwise permitted or whereimpracticable to determine. As well, voluntary changes in accounting policy aremade only when required by a primary source of GAAP or the change results inmore relevant and reliable information. (o) Accounting pronouncements The Company has assessed new and revised accounting pronouncements that havebeen issued that are not yet effective and determined that the following mayhave a significant impact on the Company: - As of January 1, 2008, Caza will be required to adopt two new CICA standards,Section 3862 "Financial Instruments - Disclosures" and Section 3863 "FinancialInstruments - Presentation," which will replace Section 3861 "FinancialInstruments - Disclosure and Presentation." The new disclosure standardincreases the emphasis on the risks associated with both recognized andunrecognized financial instruments and how those risks are managed. The newpresentation standard carries forward the former presentation requirements. Thenew financial instruments presentation and disclosure requirements were issuedin December 2006 and the Company is assessing the impact on its consolidatedfinancial statements. - As of January 1, 2008, Caza will be required to adopt new CICA standard,Section 1535 "Capital Disclosures," which will require companies to disclosetheir objectives, policies and processes for managing capital. In addition,disclosures are to include whether companies have complied with externallyimposed capital requirements. The new capital disclosure requirements wereissued in December 2006, and the Company is assessing the impact on itsconsolidated financial statements. - As of January 1, 2008, the Company will be required to adopt CICA HandbookSection 3031 Inventory. This new standard is effective for interim and annualfinancial statements relating to fiscal years beginning on or after July 1,2007. - In January 2006, the CICA Accounting Standards Board ("AcSB") adopted astrategic plan for the direction of accounting standards in Canada. As part ofthat plan, accounting standards in Canada for public companies are expected toconverge with International Financial Reporting Standards ("IFRS") by the end of2011. The Company continues to monitor and assess the impact of convergence ofCanadian GAAP and IFRS. - In February 2008, the CICA issued Section 3064 Goodwill and Other IntangibleAssets, replacing Section 3062 Goodwill and Other Intangible Assets and Section3450 Research and Development Costs. Various other changes have been made toother sections of the CICA Handbook for consistency. The new Section will beapplicable to financial statements relating to fiscal years beginning on orafter October 1, 2008. Accordingly, the Company will adopt the new standard forits fiscal year beginning January 1, 2009. The new Section establishes standardsfor the recognition, measurement, presentation and disclosure of goodwillsubsequent to its initial recognition and of intangible assets byprofit-oriented enterprises. Standards concerning goodwill are unchanged fromthe standards included in the previous Section 3062. 3. Property and Equipment -------------------------------------------------------- 2007 2006 -------------------------------------------------------- Accumulated Accumulated depletion Net depletion Net and Book and Book Cost depreciation Value Cost depreciation Value -------------------------------------------------------- Petroleum and natural gas properties and equipment $21,089 $ 1,201 $19,888 $8,954 $ 766 $8,188 Office equipment and furniture 597 131 466 102 47 55 -------------------------------------------------------- $21,686 $ 1,332 $20,354 $9,056 $ 813 $8,243 -------------------------------------------------------- At December 31, 2007 the cost of petroleum and natural gas properties includes$8,133 (December 31, 2006 - $6,674) relating to unproven properties which havebeen excluded from costs subject to depletion and depreciation. The Company capitalized general and administrative expenses of $1,528 in theyear ended December 31, 2007 (2006 - $463) relating to exploration anddevelopment activities of which $173 related to stock based compensation in 2007(2006 - $Nil). The Company performed an impairment test at December 31, 2007 to assess whetherthe carrying value of its petroleum and natural gas properties exceeds fairvalue. No impairment was recorded as at December 31, 2007. The petroleum andnatural gas future prices (adjusted for quality differentials) are based oncommodity price forecasts of the Company's independent reserve evaluators. The following table outlines benchmark prices used in the impairment test atDecember 31, 2007: NYMEX Natural Crude Oil Gas Year ($/bbl) ($/mmbtu) ------------------------------------------------------------------------ 2008 90.86 8.70 2009 88.42 8.48 2010 86.05 8.59 2011 85.64 8.57 Thereafter (inflation %) +2.0%/yr +2.0%/yr ------------------------------------------------------------------------ 4. Asset Retirement Obligations The following table presents the reconciliation of the beginning and endingaggregate carrying amount of the obligation associated with the retirement ofoil and gas properties: 2007 2006 --------- --------- Asset retirement obligation, beginning of year $ 56 $ 160 Obligations incurred 90 10 Accretion expense 3 2 Obligations settled - (116) Change in estimates 137 - --------- --------- Asset retirement obligation, end of year $ 286 $ 56 --------- --------- The undiscounted amount of cash flows, required over the estimated reserve lifeof the underlying assets, to settle the obligation, adjusted for inflation, isestimated at $398 (2006 - $62). The obligation was calculated using acredit-adjusted risk free discount rate of 6 percent and an inflation rate of 3percent. It is expected that this obligation will be funded from general Companyresources at the time the costs are incurred with the majority of costs expectedto occur between 2009 and 2020. 5. Income Taxes The following is a reconciliation of income taxes, calculated at the statutorycombined federal and provincial income tax rates, to the income tax recoveryincluded in the consolidated statements of net loss. -------------------------------------------------------------------------- Years ended December 31, -------------------------------------------------------------------------- ($000's) 2007 2006 Net Income (loss) before taxes (2,391) (2,637) Income tax (recovery) at statutory rate of (768) (847) 32.12% (2006 - 32.12 %) Difference in statutory tax rates: Canada vs. US (69) (76) Stock-based compensation 127 723 Taxable income taxed in the LLC's - 37 Texas franchise tax 30 18 Other 67 76 ----------------------- Total (613) (69) ----------------------- Prior to September 14, 2006, the operations of the Company were conducted in aTexas limited liability company, Falcon Bay, and three other limited liabilitycompanies that were wholly owned by Falcon Bay. All of the Company's operationsprior to that time were conducted in the United States. As a limited liabilitycompany, the combined incomes of the three companies were not subject to U.S.federal income taxation but were instead allocated to and taxed in the hands ofits owners. On September 14, 2006, when Falcon Bay merged into Caza Petroleum, the Company'soperations became subject to U.S. federal income tax at the Company level. Thefollowing items detail the differences that result in the provision for incometaxes not being equal to the combined United States federal and state tax rateof 35% applied to income (loss) before taxes. The components of future income tax liabilities (assets) at December 31, 2007and 2006 are as follows: ------------------------------------------------------------------------- ($000's) 12/31/2007 12/31/2006 ------------------------------------------------------------------------- Future income tax liability (asset): Petroleum and natural gas properties 4,079 770 Net operating losses carried forward (4,505) (549) ------------------------------------------------------------------------- Net future income tax liability (asset) (426) 221 ------------------------------------------------------------------------- The Company has the following losses available to be carried forward: ------------------------------------------------------------------------- Expiring at December 31, Amounts ------------------------------------------------------------------------- ($000's) US Canada 2026 1,524 205 2027 11,085 1,065 ------------------------------------------------------------------------- 6. Share Capital (a) Authorized Unlimited number of voting common shares. (b) Issued --------------------------------------------- 2007 2006 --------------------------------------------- Amounts Amounts Shares ($000's) Shares ($000's) --------------------------------------------- Opening balance common shares 44,030,000 $ 13,478 - $ - Incorporated on June 9, 2006 - - 1 - Redemption of Initial share - - (1) - Founders shares (Note 6 (c)) - - 5,000,000 243 Initial offering shares (Note 6 (d)(i)) - - 34,420,000 11,659 1st Over-allotment closing (Note 6 (d)(i)) - - 4,610,000 1,576 2nd Over-allotment closing (Note 6 (d)(i)) 970,000 345 - - Exchangeable shares 1,498,000 52 - - Entitlement shares (Note 6 (d)(iv)) 3,442,000 - - - Entitlement Shares (Note 6 (d)(iv)) 558,000 - - - IPO Shares (Note 6 (d)(v)) 18,821,000 11,162 - - --------------------------------------------- Balance end of year 69,319,000 25,037 44,030,000 $ 13,478 --------------------------------------------- Opening balance exchangeable rights (Note 6(e)) 28,000,000 970 - - Issuance of exchangeable shares - - 28,000,000 970 Rights exercised March 8, 2007 (1,103,200) (38) - - Rights exercised April 20, 2007 (394,800) (14) - - --------------------------------------------- Balance end of year 26,502,000 918 28,000,000 970 --------------------------------------------- Opening balance warrants 21,856,800 4,475 - - Initial offering warrants (Note 6 (d)(i)(ii)) - - 17,210,000 3,700 Initial offering broker warrants (Note 6 (d)(iii)) - - 2,065,200 246 1st Over-allotment warrants (Note 6 (d)(i)(ii)) - - 2,305,000 496 1st Over-allotment broker warrants (Note 6 (d)(iii)) - - 276,600 33 2nd Over-allotment warrants (Note 6 (d)(i)(ii)) 485,000 104 - - 2nd Over-allotment broker warrants (Note 6 (d)(iii)) 58,200 7 - - Entitlement warrants September 22, 2007 (Note 6 (d)(iv)) 1,721,000 - - - Entitlement warrants November 21, 2007 (Note 6 (d)(iv)) 279,000 - - - IPO broker warrants (Note 6 (d)(v)) 700,000 270 - - --------------------------------------------- Balance end of year 25,100,000 4,856 21,856,800 4,475 --------------------------------------------- --------------------------------------------- $ 30,811 $ 18,923 --------------------------------------------- (c) Founders Shares: On August 28, 2006, the Company completed a founder's common share offering of5,000,000 shares at a purchase price of US$0.05 per share. A stock-basedcompensation expense of $2,250 was recognized on the issuance of the founder'sshares. (d) Initial Placement: (i) On September 22, 2006, the Company completed the initial closing of aprivate equity offering of 34,420,000 units at a purchase price of US$0.50 perunit. Each unit consisted of one common share, 1/2 of a warrant and oneentitlement right (see Note d(iv)). Each full warrant gives the holder the rightto purchase one common share at an exercise price of US$1.00 per common share.Share issuance costs of $6,287 have been netted against this offering. OnNovember 20, 2006, the Company completed its first over-allotment closing of4,610,000 units. On January 17, 2007 the Company completed its secondover-allotment closing of 970,000 units. The initial closing of the privateequity offering and subsequent over-allotment closings are referred to as the"Initial Placement". The Company has allocated US$0.215 per warrant to thewarrants issued in conjunction with the Private Equity Offering, with theremaining value allocated to the common shares. (ii) Each full warrant is exercisable until the earlier of (i) three years afterthe date the common shares are listed on the Toronto Stock Exchange or the TSXVenture Exchange, subject to reduction by the Company to such lesser time periodas may be required by the exchange on which the Company's securities are listedand (ii) four years following the closing date on which the warrants wereacquired. (iii) In connection with the Initial Placement, the Company issued 2,400,000warrants (the "Broker Warrants") to the agents as partial consideration fortheir services rendered in connection with the Initial Placement. Each BrokerWarrant entitles the holder to purchase one common share at a price of US$0.50until March 22, 2008 in the case of 334,800 warrants and March 31, 2008 for thebalance of the warrants. The Company ascribed US$0.119 per warrant to each ofthe Broker Warrants. No Broker Warrants have been exercised at December 31,2007. The fair value of each warrant and Broker Warrant was determined using theassumptions set out below: ------------------------------------------------------------------------- December December 31, 2007 31, 2006 ------------------------------------------------------------------------- Warrants Exercise price - US$1.00 Risk-free interest rate - 4.75% Expected maturity (years) - 3.0 Expected volatility - 88.16% Dividend yield - 0% Broker Warrants Exercise price US$0.79 US$0.50 Risk-free interest rate 4.00% 4.75% Expected maturity (years) 2.0 1.5 Expected volatility 88.16% 88.16% Dividend yield 0% 0% (iv) As part of the Initial Placement, the Company issued to the purchasers,liquidity entitlements, which provided purchasers the right to receive for noadditional consideration additional common shares equal to 10% of the commonshares purchased in the Initial Placement if a "liquidity event" did not occurwithin a specified time period. The Company issued additional common shares forthese liquidity entitlements in the amount of 3,442,000 shares on September 22,2007, and 558,000 shares on November 20, 2007. Additionally, the liquidityentitlements required a comparable adjustment to be made to the number of sharespurchasable from exercise of the warrants received in the Initial Placement. Asa result, the Company adjusted the warrants to provide for the right to purchaseadditional common shares in the amount of 1,721,000 shares on September 20,2007, and 279,000 shares on November 20, 2007. (v) On December 12, 2007 the Company completed its initial public offering("IPO") issuing a total of 18,821,000 common shares. The shares were issued atCAD $0.80 or USD $0.7926 raising funds of USD $14,916 less issuance costs of USD$3,484 that have been netted against the offering. In connection with the IPO,the Company issued 700,000 Broker Warrants to the agents as partialconsideration for their services rendered in connection with the IPO. EachBroker Warrant entitles the holder to purchase one common share at a price ofCAD $0.80 until December 12, 2009. The Company ascribed USD $0.385 per warrantto each of the Broker Warrants. No Broker Warrants have been exercised atDecember 31, 2007. (e) Acquisition of Caza Petroleum: Share Exchange and Shareholders Agreement Prior to the consummation of the Initial Placement the Company became a party toa Share Exchange and Shareholders Agreement with Caza Petroleum and themanagement of Caza Petroleum and their respective spouses. Under the agreementmanagement are not permitted to transfer their shares of Caza Petroleum (otherthan among themselves and family members), except to the Company under certainconditions. Management has the right at any time to exchange their CazaPetroleum shares for common shares of the Company on the basis of 2,800 commonshares for each Caza Petroleum share, subject to adjustment in certain events.In addition, the Company has the right to cause each manager to exchange hisCaza Petroleum shares for common shares in certain circumstances, including achange of control, liquidation, sale of substantially all of the assets, orbankruptcy of the Company, or the divorce, death or incapacity of the manager ora breach of the agreement. (f) Stock options The Company granted stock options to its directors, officers and employees underits stock option plan dated January 31, 2007, and as amended and restated datedOctober 10, 2007. The maximum number of common shares for which options may begranted, together with shares issuable under any other share compensationarrangement of the Company, is limited to 10% of the total number of outstandingcommon shares at the time of grant of any option. For this determination,outstanding common shares include common shares issuable in exchange for CazaPetroleum shares under the Share Exchange and Shareholders Agreement. AtDecember 31, 2007, the maximum number of shares issuable under the stock optionplan was 9,582,100. The exercise price of each option may not be less than thefair market value of the Company's common shares on the date of grant. Except asotherwise determined by the Board and subject to the limitation that the stockoptions may not be exercised later than the expiry date provided in the relevantoption agreement but in no event later than 10 years (or such shorter periodrequired by an exchange) from their date of grant, options cease to beexercisable: (i) immediately upon a participant's termination by the Company forcause, (ii) 90 days (30 days in the case of a participant engaged in investorrelations activities) after a participant's termination from the Company for anyother reason except death and (iii) one year after a participant's death.Subject to the Board's sole discretion in modifying the vesting of stockoptions, stock options will vest, and become exercisable, as to 33?% on thefirst anniversary of the date of grant and 33?% on each subsequent anniversaryof the date of grant. All options granted to a participant but not yet vestedwill vest immediately upon a change of control (as defined in the stock optionplan) or upon the Company's termination of a participant's employment withoutcause. 2007 Weighted average Number of Exercise Stock Options options price ---------------------------------------------------- Beginning of year - - Granted 6,605,000 $ 0.6159 Exercised - - Forfeited - - --------------------------- End of year 6,605,000 $ 0.6159 --------------------------- --------------------------- Weighted Average Remain- ing Number Number Contrac- Exercisable Date of Outstand- Exercise tual Date of December 31, Grant ing Price Life Expiry 2007 -------------------------------------------------------------------------- January 31, 2007 3,325,000 0.50 9.09 January 31, 2017 1,108,333 February 5, 2007 400,000 0.50 9.10 February 5, 2017 - May 10, 2007 220,000 0.50 9.34 May 10, 2017 - June 11, 2007 20,000 0.50 9.45 June 11, 2017 - December 12, 2007 2,640,000 0.79 9.95 December 12, 2017 - -------------------------------------------------------------------------- 6,605,000 9.45 1,108,333 -------------------------------------------------------------------------- In 2007, the weighted average fair market value per option of $0.359 wasestimated using the Black-Scholes option pricing model with the followingassumptions: 2007 ---------- Dividend yield Nil Expected volatility 88.16% Risk free rate of return 4.00-4.75% Weighted average life 3 years (g) Escrowed securities In accordance with the policies of the TSX, a total of 20,457,500 exchangeableshares were held pursuant to escrow agreements. In addition 25,200,000 shares ofnon-management common shares have been held pursuant to the escrow agreements.One-third of the escrowed shares are to be released six months after the date oflisting on the TSX of December 12, 2007. One-half of the escrowed sharesremaining in escrow are to be released twelve months after the date of listingon the TSX. All remaining shares then remaining in escrow will be releasedeighteen months after the date of listing on the TSX. (h) Contributed surplus The following table presents the changes in contributed surplus: 2007 2006 ------------------------------------------------------------------------- Balance, beginning of period $ 2,250 $ Nil Founder shares (Note 6c) - 2,250 Stock based compensation 537 - ------------------------------------------------------------------------- Balance, end of period $ 2,787 $ 2,250 ------------------------------------------------------------------------- 7. Related Party Transactions The aggregate amount of expenditures made to related parties: (a) The Vice President, Exploration of Caza Petroleum, prior to becoming anemployee, was a consultant to Caza Petroleum and as a consultant was eligible toreceive a 2% carried working interest (subject to proportionate reduction basedon the Company's working interest) to casing point in the initial test well incertain prospects. The applicable prospects are the Bongo, Puku, Eland and Sableproperties. Since becoming an employee this individual is no longer eligible toparticipate for additional interests beyond those described. (b) In March 2007, Caza Petroleum entered into a farmout agreement with SingularOil & Gas Sands, LLC ("Singular") to participant in the drilling of theMatthys-McMillan well in Wharton County, Texas. Under the terms of thatagreement, Singular paid 15.67% of the drilling costs to casing point of theMatthys-McMillan well to earn a 14.01% interest in the property thereafter. Thisparticipation was in the normal course of Caza's business and on the same termsand conditions to those of other joint venture partners. Singular is a relatedparty as it is a company under common control with Sercor Limited, which is asignificant shareholder of Caza. (c) Interest of $7 was paid to an officer in 2006 for money advanced to theCompany. The advanced funds were repaid during 2006. All related party transactions are in the normal course of operations and havebeen measured at the agreed to exchange amounts, which is the amount ofconsideration established and agreed to by the related parties and which iscomparable to those negotiated with third parties. 8. Commitments and Contingencies (a) As of December 31, 2007, the Company is committed under operating leases forits offices and corporate apartment. The Company is committed to the followingaggregate minimum lease payments which are shown below: ----------------------------- ($'000's) ----------------------------- 2008 222 2009 169 (b) The Company received $2,565 in 2004, 2005 and 2006 under an agreementwhereby the funds received are only repayable from production from three wellson the Aldwell Ranch project at a rate of 47.281% of 100% of the revenues untilrepayment of the project financing and 40.787% of 100% of the revenuesthereafter. The repayment obligation ceases upon ninety percent (90%) of thethen current estimated recoverable reserves being produced. This has beenaccounted for as a net profits interest and has reduced the carrying amount ofthe full cost center. 9. Supplementary Information (a) net change in non-cash working capital ($'000's) 2007 2006 ---------------------------------------------------------------- Provided by (used in) -------------------- Accounts receivable (1,116) (1,006) Prepaid and other (211) (101) Accounts payable and accrued liabilities 2,706 2,600 ---------------- 1,379 1,493 ---------------- ---------------- Summary of changes Operating (760) 165 Financing 837 - Investing 1,302 1,328 ---------------- 1,379 1,493 ---------------- ---------------- (b) supplementary cash flow information ($'000's) 2007 2006 ---------------------------------------------------------------- Interest paid 37 29 Interest received 455 192 Cash taxes paid 34 - (c) cash and cash equivalents ($'000's) 2007 2006 ---------------------------------------------------------------- Cash on deposit 4,238 195 Money market instruments 8,957 13,502 ---------------- Cash and cash equivalents 13,195 13,697 ---------------- ---------------- The money market instruments bear interest at a rate of 4.819% as at December31, 2007 (December 31, 2006 - 5.19%) 10. Financial Instruments As disclosed in Note 2(b), the Company holds various forms of financialinstruments. The nature of these instruments and the Company's operations exposethe Company to commodity price, credit, and foreign exchange risks. The Companymanages its exposure to these risks by operating in a manner that minimizes itsexposure to the extent practical. (a) Commodity price risk The Company is subject to commodity price risk for the sale of natural gas. TheCompany may enter into contracts for risk management purposes only, in order toprotect a portion of its future cash flow from the volatility of natural gascommodity prices. (b) Credit Risk A substantial portion of the Company's accounts receivable are with customersand joint-venture participants in the oil and natural gas industry and aresubject to normal industry credit risks. The carrying amount of accountsreceivable reflects management's assessment of the credit risk associated withthese customers and participants. The Company's oil and natural gas productionis sold to large marketing companies. Typically, the Company's maximum creditexposure to customers is revenue from two months of sales. During the year endedDecember 31, 2007, the Company sold 95.47% (2006 - 80.24%) of its natural gasand condensate production to a single purchaser. These sales were conducted ontransaction terms that are typical for the sale of natural gas and condensate inthe United States. At December 31, 2007, the accounts receivable from sales ofproduction represented approximately 18% of the Company's accounts receivable.At December 31, 2007, one of the Company's joint venture partners representedapproximately 26% of the Company's accounts receivable and two of the Company'sjoint venture partners represented approximately 37% of the Company's accountsreceivable. (c) Foreign Currency Exchange Risk The Company is exposed to foreign currency exchange fluctuations, as certaingeneral and administrative expenses are or will be denominated in Canadiandollars and United Kingdom pounds sterling. The Company's sales of oil andnatural gas are all transacted in US dollars. (d) Fair Value of Financial Instruments The Company has determined that the fair values of the financial instrumentsconsisting of cash and cash equivalents, accounts receivable and accountspayable are not materially different from the carrying values of suchinstruments reported on the balance sheet due to their short-term nature. Annual Report and AGM The annual report will be available on the Company's website, www.cazapetro.com,and posted to shareholders shortly. The annual report will be accompanied by aninformation circular and a notice of the annual general meeting of the companywhich will be held at 10:00a.m. on or about May 27, 2008 at the WoodlandsWaterway Marriott, located at 1601 Lake Robbins Drive, The Woodlands, Texas. FOR FURTHER INFORMATION PLEASE CONTACT: Caza Oil & Gas, Inc.John McGoldrickExecutive Chairman(281) 363-4442Email: jmcgoldrick@cazapetro.comWebsite: www.cazapetro.com OR Noble & Company LimitedNick Naylor / Jamie BoydNominated Adviser and Joint Broker+44 (0) 20 7763 2200 OR Aquila Financial Ltd.Peter ReillyFinancial Public Relations Advisers+44 (0) 20 7202 2601 The Toronto Stock Exchange has neither approved nor disapproved the informationcontained herein. INDUSTRY: Energy and Utilities-Oil and Gas SUBJECT: ERN This information is provided by RNS The company news service from the London Stock Exchange