Pearl Exploration and Production Ltd.



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  May 6, 2009 - 08:00 ET
Pearl Announces First Quarter 2009 Financial and Operating Results

 

CALGARY, ALBERTA--(Marketwire - May 6, 2009) - Pearl Exploration and Production Ltd. ("Pearl" or the "Company") (TSX:PXX)(FIRST NORTH:PXXS) is pleased to announce its financial and operating results for the three months ended March 31, 2009.

Highlights include:

- Hired a new heavy oil management team;

- Acquired an additional 15% interest in the SAGD project at Blackrod, to bring the Company's ownership to 80%;

- Achieved positive results from the polymer pilot flood at Mooney;

- Undertook a 10 well delineation program at Blackrod to confirm the aerial extent and quality of the resource;

- Maintained a strong balance sheet with $8.6 million in working capital and no debt;

- Production, cash flow and net earnings impacted by low commodity prices;

- Subsequent to the quarter end, added to our working capital with a $46 million equity financing.

John Festival, new President of Pearl, commenting on the results, indicated that, "the first quarter of 2009 was a challenging economic environment for Pearl, as well as for most oil and gas producers. The global economic conditions during the quarter have impacted oil and gas prices and this is reflected in Pearl's financial and operating performance. We are fortunate to have a strong balance sheet with positive working capital and no debt, which will allow us to weather the global economic downturn. With the current weak economic conditions we elected to conserve our cash and minimize capital spending, including workover capital, which resulted in production slipping about 10% from fourth quarter levels. As prices improve we will allocate funds to restore some of this production. While the current market is providing its challenges, we are generally bullish on oil prices going forward and we are positioning the Company to capitalize on its opportunities when conditions improve.

The new management team has had about three months to review and evaluate Pearl's operations, and while this review will continue, at this point, we are very optimistic about the development potential of our core properties of Mooney, Onion Lake and Blackrod. Development of these properties will take time and capital. Development will require extensive regulatory and other approvals because we will be utilizing secondary and tertiary recovery methods. Typically, with these recovery methods there is a relatively long lag time between capital spent and seeing response in terms of incremental production and cash flow. Nevertheless, we believe development of these projects over the medium term will ultimately add production, reserves and value to our shareholders."

Operations Review

Mooney

At Mooney, we continue to monitor the results of the water and polymer pilot floods. The current pilot polymer flood consists of two horizontal injectors and one horizontal producer. The results of the pilot have been positive to date. The initial production rate of a typical Mooney well is in excess of 100 barrels of oil per day and then drops off by 50 - 70% after 6-12 months. With the introduction of polymer, production from the producing pilot well has been restored to its initial production rate.

In addition to continuing to monitor the pilot results, over the next six months we will undertake studies to refine the type and quantity of polymer to use, as well as evaluate the suitability of adding a surfactant/alkali with the polymer flood, which has the potential of increasing overall oil recovery rates. The Company will also be working with the Alberta Department of Energy to establish an EOR royalty scheme for Mooney when commercial development of the polymer flood is established.

Onion Lake

At Onion Lake, during the first quarter of 2009, Pearl completed testing a Cyclic Steam Stimulation (CSS) pilot which was initiated in the second half of 2008. Positive results were achieved from the pilot, with each of the two test wells reaching peak production in excess of 200 barrels of oil per day. Over the next six months we will continue to evaluate the results of the CSS pilot, as well as study the applicability of a modified SAGD recovery process to develop Onion Lake. However, due to the incremental capital and operating costs, thermal development at Onion Lake will be deferred until oil prices improve. We will likely focus on continued conventional primary development, with the potential of 50-75 additional drilling locations.

Blackrod

At Blackrod, in early 2009 we acquired an additional 15% working interest from our joint interest partner, bringing our working interest to 80% in the main project area planned for development. In addition, Pearl was named operator at Blackrod.

During the first quarter of 2009, 10 additional wells were drilled to evaluate and understand the areal extent and quality of the resource. We are currently evaluating the results of these wells.

Going forward, our plan is to proceed with an application for regulatory approval to conduct a 1-3 well pair SAGD pilot at Blackrod to obtain better information on reservoir performance, refine operating and capital cost estimates and other relevant information for full field development. We are currently gathering data that will allow us to file the application in the summer, and it is expected it will take 6-12 months to receive the required approvals.

Production Volumes

Pearl's crude oil and natural gas production volumes decreased to 5,510 boe per day during the first quarter of 2009 compared with 10,503 boe per day during the first quarter of 2008. The decrease from the prior year is a result of Pearl selling approximately 3,200 boe per day of production mid last year. First quarter production was also 11% lower than fourth quarter 2008 of 6,198 boe per day. The principle reason production is lower is due to the Company's decision to defer maintenance capital while oil prices are low. As oil prices have improved somewhat in the second quarter, maintenance work will be undertaken to restore some of the lost production.


--------------------------------------------------------------------------
                                Three months ended      Three months ended
                                     March 31 2009           March 31 2008
--------------------------------------------------------------------------
                            Oil(bbls/d)  Gas(mcf/d) Oil(bbls/d)  Gas(mcf/d)
Onion Lake                       2,131         167       2,027         669
Mooney                           1,343       2,146       2,408       2,737
Salt Lake                          288         523         504         689
Celtic - Pike's Peak                 -           -       1,503         516
Ear Lake                           433           1         414         284
Long Coulee/McGregor/Pageant        25       1,599          14       2,555
Other                              203       2,091       1,840       3,307
--------------------------------------------------------------------------
                                 4,423       6,527       8,710      10,757
--------------------------------------------------------------------------

Financial Results

First Quarter 2009 Results

In Canada and the US, crude oil prices are generally based on WTI benchmark prices. In the first quarter 2009, WTI prices were significantly lower averaging US$43.08/bbl compared with US$97.90/bbl in 2008. The decrease is attributable to the decreased demand for oil as a result of the global recession and financial crisis. The WTI forward strip price for the remainder of 2009 is approximately US$53 per barrel, suggesting continued reduced demand. Pearl predominately produces heavy oil, which sells for less than light oil, due to increased processing required for a heavy barrel. One of the benchmark prices for heavy oil in Canada is the Western Canadian Select ("WCS") stream price. During the first quarter of 2009, the WCS reference price averaged 79% of the WTI price, which is consistent with the 78% experienced in Q1 2008. However, more recently heavy oil differentials have narrowed and WCS is selling for 91% of WTI.

Oil prices in Canada are also impacted by the Canada/US exchange rate, since oil is generally priced in US dollars. During the first quarter of 2009, the Canadian dollar was relatively weak against the US dollar with an exchange rate of $1.2453. This is a significant decrease from the first quarter 2008 where the Canadian dollar was, on average, even with the US dollar.

In the first quarter 2009, natural gas prices decreased 38% compared to the same period in 2008, reflecting lower demand. The AECO-C gas price averaged $4.66 per GJ in Q1 2009 compared to $7.49 per GJ in 2008. Similar to oil prices, natural gas prices decreased as a result of lower demand caused by slowing economies and warm weather which resulted in higher gas storage levels. Lower natural gas prices have continued during the second quarter of 2009.

Oil and Gas Production, Pricing and Revenue

 
---------------------------------------------------------------------------
                                                         Three        Three
                                                        months       months
                                                         ended        ended
                                                      March 31     March 31
                                                          2009         2008
---------------------------------------------------------------------------
Daily production / sales volumes (1)
 Oil (bbl/d)                                             4,423        8,710
 Natural gas (mcf/d)                                     6,527       10,757
 Combined (boe/d)                                        5,510       10,503
 
Product pricing ($)
 Crude oil - per bbl                                     31.99        63.28
 Natural gas - per mcf                                    5.08         7.79
 Combined - per boe                                      31.77        60.50
 
Revenue ($000s)
Oil and gas revenue - gross                             15,755       57,830
Royalties                                               (2,874)     (13,931)
Oil and gas revenue - net                               12,881       43,899
---------------------------------------------------------------------------
(1) gas production converted at 6:1
 

Overall, production, on a boe basis, decreased 48% to 5,510 boe/d in the first quarter 2009 compared with 10,503 boe/d in the same period 2008. 2009 production was impacted by the sale of oil and gas properties in May 2008. The properties that were sold were producing approximately 3,200 boe per day at the time of sale. The remaining decrease is due to natural decline during 2008 and the shutting in of some wells in 2009 due to lower prices. Until commodity prices improve, the Company will limit its capital expenditures, including maintenance capital. As a result, production for the remainder of 2009 will likely decrease from first quarter levels. With minimal maintenance capital, the Company anticipates that production will average between 4,500 and 5,000 boe per day for the remainder of the year.

The decrease in production costs from the first quarter of 2008 reflects the lower production levels in 2009.

Production costs on a per BOE basis averaged $20.50 for the current quarter which is an increase over the corresponding three month period average of $19.76 in 2008. The increase in per unit operating costs for the period is principally due to a number of wells producing for partial months. A number of wells were shut-in for economic reasons and other wells were shut-in requiring maintenance. Fixed costs continue on these wells even though they are not on production.

General and administrative costs of $2.9 million in the first quarter of 2009 are consistent with the $3 million in costs in 2008. The first quarter 2009 expenses include approximately $0.4 million in severance costs. As a result of these staff reductions and other cost reduction measures we anticipate lower general and administrative costs in future quarters.

DD&A expense was $22.1 million or $44.57 per boe for the current year in comparison to $25.0 million or $26.20 per boe for the prior three month period. The higher rate in 2009 is a result of a reduction in proved reserves as detailed in the Company's 2008 reserve report. Due to the reduction in reserves, the Company anticipates that the depletion rate per boe will remain high for the remainder of 2009. If oil prices remain low, the Company may potentially be required to take a "ceiling test" write-down in future periods.

Pearl's capital program is focused on heavy oil opportunities. For the first quarter ended 2009, Pearl incurred $3.1 million in capital expenditures, a significant decrease from the $17.5 million spent in the first quarter of 2008. First quarter 2009 costs included facility costs and the drilling of one well in the Mooney area.

Operating Netback

 
---------------------------------------------------------------------------
                                                         Three        Three
                                                        months       months
                                                         ended        ended
                                                      March 31     March 31
                                                          2009         2008
---------------------------------------------------------------------------
Revenues                                              $  31.77     $  60.50
Royalties                                                (5.80)      (14.58)
Transportation costs                                     (2.63)       (1.25)
Operating costs                                         (20.50)      (19.76)
---------------------------------------------------------------------------
Netback per boe ($)                                       2.84        24.91
---------------------------------------------------------------------------
 

The 2008 netback of $2.84 per boe has decreased significantly from the $24.91 per boe reported in the same quarter of 2008. This decrease is consistent with the significant decrease in oil revenue due to low market prices for oil in the first quarter 2009.

The complete Management's Discussion and Analysis (MD&A) with the Consolidated Financial Statements are available on the Company's website (www.pearleandp.com) and will also be available on the SEDAR website (www.sedar.com).

PEARL EXPLORATION AND PRODUCTION LTD.

 
---------------------------------------------------------------------------
Consolidated Balance Sheets
(unaudited)
---------------------------------------------------------------------------
                                                      March 31, December 31,
(Cdn$ in thousands)                                       2009         2008
---------------------------------------------------------------------------
 
Assets
Current assets
 Cash                                              $    13,471  $    24,059
 Accounts receivable                                     9,664        9,536
 Income taxes and capital taxes receivable                 607        5,607
 Prepaid expenses and deposits                           1,482        1,658
                                                   -----------  -----------
                                                        25,224       40,860
 
 
Investments (note 5)                                     1,851        9,619
Petroleum and natural gas properties (note 6)          423,761      421,664
                                                   -----------  -----------
                                                   $   450,836  $   472,143
                                                   -----------  -----------
                                                   -----------  -----------
 
Liabilities
Current liabilities
 Accounts payable and accrued liabilities          $    16,654  $    34,409
 
Future income tax                                        3,560        4,036
Asset retirement obligation (note 8)                    23,257       20,064
                                                   -----------  -----------
                                                        43,471       58,510
                                                   -----------  -----------
 
Shareholders' equity
 Share capital (note 10)                               735,182      723,122
 Contributed surplus (note 10)                          14,081       11,895
 Deficit                                              (341,898)    (321,382)
                                                   -----------  -----------
                                                       407,365      413,635
                                                   -----------  -----------
                                                   $   450,836  $   472,143
                                                   -----------  -----------
                                                   -----------  -----------
 Commitments and contingencies (note 11)
See accompanying notes to consolidated financial statements.
 

 
---------------------------------------------------------------------------
Consolidated Statement of Operations, Comprehensive Loss and Deficit
(unaudited)
---------------------------------------------------------------------------
(Cdn$ in thousands, except for per share amounts)              
                                                Three months ended March 31
                                                   -----------  -----------
                                                          2009         2008
                                                   -----------  -----------
Revenue
 Oil and gas sales                                 $    15,755  $    57,830
 Interest income                                            65          116
 Royalties                                              (2,874)     (13,931)
                                                   -----------  -----------
                                                        12,946       44,015
                                                   -----------  -----------
 
Expenses
 Production                                             10,165       18,884
 Transportation                                          1,304        1,197
 General and administrative                              2,885        3,027
 Depletion, depreciation and accretion                  22,104       25,043
 Stock-based compensation (recovery)                       (13)         901
 Interest                                                   20          339
 Foreign currency exchange gain                           (453)         (36)
                                                   -----------  -----------
                                                        36,012       49,355
                                                   -----------  -----------
 
Loss before income taxes                               (23,066)      (5,340)
                                                   -----------  -----------
 
Income taxes
 Future income tax (recovery)                           (2,752)      (2,249)
 Income taxes and capital taxes expense                    202          699
                                                   -----------  -----------
                                                        (2,550)      (1,550)
                                                   -----------  -----------
 
Loss and comprehensive loss for the period             (20,516)      (3,790)
 
Deficit, beginning of period                          (321,382)    (242,520)
                                                   -----------  -----------
 
Deficit, end of period                             $  (341,898) $  (246,310)
                                                   -----------  -----------
                                                   -----------  -----------

Basic and diluted loss per share                   $     (0.10) $     (0.02)
Weighted average number of common shares used 
 in computing loss per share:
 basic and diluted                                 207,555,049  189,241,716

See accompanying notes to consolidated financial statements.
 

 
---------------------------------------------------------------------------
Consolidated Statements of Cash Flows
(unaudited)
---------------------------------------------------------------------------
(Cdn$ in thousands, except for per share amounts)                     
                                                Three months ended March 31
                                                   -----------  -----------
                                                          2009         2008
                                                   -----------  -----------
Operating activities
Net Loss                                           $   (20,516) $    (3,790)
Items not involving cash:
 Depletion,depreciation and accretion                   22,104       25,043
 Stock-based compensation (recovery)                       (13)         901
 Future income tax (recovery)                           (2,752)      (2,249)
 Foreign exchange gain                                    (453)         (36)
Abandonment costs                                         (174)        (417)
                                                   -----------  -----------
                                                        (1,804)      19,452
                                                   -----------  -----------
 
 Changes in non-cash working capital balances
  related to operations                                (26,030)     (13,725)
                                                   -----------  -----------
                                                       (27,834)       5,727
                                                   -----------  -----------
 
Financing activities
Advances of bank loan                                        -       25,000
                                                   -----------  -----------
                                                             -       25,000
                                                   -----------  -----------
 
Investing activities
Additions to petroleum and natural gas properties       (3,147)     (17,512)
Cash received on acquisition of BlackCore
 Resources Inc.                                          5,589            -
Changes in non-cash working capital from investing      14,804      (18,521)
                                                   -----------  -----------
                                                        17,246      (36,033)
                                                   -----------  -----------
 
Net increase (decrease) in cash                        (10,588)      (5,306)
Cash, beginning of period                               24,059        4,799
                                                   -----------  -----------
Cash, end of period                                $    13,471  $      (507)
                                                   -----------  -----------
                                                   -----------  -----------
 
Supplementary Information
 Cash interest paid                                $         9  $       339
 Cash capital taxes paid                           $         5  $       358
 
See accompanying notes to consolidated financial statements.
 

PEARL EXPLORATION AND PRODUCTION LTD.

Notes to the Consolidated Financial Statements (unaudited)

(tabular amounts in thousands of Cdn$, except as noted)

1. NATURE OF OPERATIONS

Pearl Exploration and Production Ltd. (collectively with its subsidiaries, the "Company" or "Pearl") is listed and traded on the TSX Exchange under the trading symbol "PXX" and on the First North (OMX Nordic Exchange) under the symbol "PXXS". The Company is engaged in the business of oil and gas exploration, development and production in North America.

These unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP"), and follow the same accounting policies as the financial statements for the year ended December, 31 2008, except as noted in note 2 below. These notes do not include all disclosures required in annual financial statements and are incremental to, and should be read in conjunction with the audited financial statements for the year ended December 31, 2008.

2. CHANGES IN ACCOUNTING POLICIES

On January 1, 2009, the Company adopted the following CICA Handbook Sections:

- Section 3064 "Goodwill and Intangible Assets," which replaces Section 3062 "Goodwill and other Intangible Assets." The new standard revises the requirement for recognition, measurement, presentation and disclosure of intangible assets.

- Section 1582 "Business Combinations", which replaces Section 1581 "Business Combinations". The new standard establishes principles and requirements of the acquisition method for business combinations and related disclosures.

- Section 1601 "Consolidated Financial Statements" and Section 1602 "Non-controlling Interests", both of which replace Section 1600 "Consolidated Financial Statements". Section 1601 establishes standards for the preparation of consolidated financial statements. Section 1602 provides guidance on accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination.

3. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2006, the CICA Accounting Standards Board ("AcSB") adopted a strategic plan for the direction of accounting standards in Canada. As part of that plan, accounting standards in Canada for public companies are expected to converge with International Financial Reporting Standards ("IFRS") for fiscal periods commencing on or after January 1, 2011. The Company is assessing the potential impacts of this changeover and developing a plan for the conversion.

4. ACQUISITIONS

BlackCore Acquisition - On January 8, 2009, the Company acquired all of the issued and outstanding shares of BlackCore Resources Inc. in exchange for 17,600,000 common shares of the Company, as well as 5,000,160 Class A and 5,000,160 Class B share purchase warrants. The Class A & B warrants will allow the holder to acquire one Pearl share for a price of $0.60 when the Pearl share price reaches a volume weighted average price for 30 consecutive days of $1.50 and $2.00, respectively. The warrant price was calculated by using the weighted average share price for the five days before and after the date the agreement was entered into.

The consideration, including transaction costs, for the BlackCore acquisition totaled $12.9 million. The allocation of the purchase price is as follows:


-----------------------------------------------------------------------
Net assets acquired
Petroleum and natural gas properties                            $12,691
Working capital                                                   5,468
Asset retirement obligation                                      (3,023)
Future income tax                                                (2,274)
-----------------------------------------------------------------------
Total net assets acquired                                       $12,862
-----------------------------------------------------------------------

Consideration
Shares                                                           10,560
Warrants                                                          2,200
Acquisition costs                                                   102
-----------------------------------------------------------------------
Total purchase price                                            $12,862
-----------------------------------------------------------------------

5. INVESTMENTS

                                                   --------------------
                                                   March 31,   December
                                                       2009    31, 2008
                                                   --------------------
Investment in Serrano Energy Ltd. ("Serrano")       $     -     $ 7,768
MAV Notes (formerly Asset-backed commercial paper)    1,288       1,288
Investment in Tyner Resources Ltd. ("Tyner")            563         563
                                                   --------------------
                                                    $ 1,851     $ 9,619
                                                   --------------------

(a) On January 28, 2009, the Company closed an agreement with Serrano Energy Ltd. ("Serrano") to exchange the Company's equity interest in Serrano for a 15% increased interest in the Blackrod area lands and a carried work commitment of $5 million. The Company was also appointed the operator of the Blackrod project.

(b) The Company acquired an interest in third party asset-backed commercial paper ("ABCP") with a face value of $5 million on October 19, 2007 as part of a corporate acquisition. As a result of liquidity issues in the ABCP market, these investments did not settle on maturity. On January 21, 2009, a restructuring plan was implemented which resulted in the Company receiving longer-term replacement notes for its investment in short-term ABCP.

The Company received the following replacement notes:


-----------------------------------------------------------------------
Notes                Maturity Date(1)    Interest Rate(2)   Face Amount
-----------------------------------------------------------------------
MAV II Class A-1     July 15, 2056       BA -0.5%               $ 1,537
MAV II Class A-2     July 15, 2056       BA -0.5%                 2,804
MAV II Class B       July 15, 2056       BA -0.5%                   509
MAV II Class C       July 15, 2056       BA +20%                    150
-----------------------------------------------------------------------
                                                                $ 5,000
-----------------------------------------------------------------------
1) Maturity date reflects legal maturity date. The latest maturity date
   of the underlying assets is December 31, 2016. 
2) BA represents Bankers Acceptance interest rates with a maturity of
   90 days.

The replacement notes have been classified as held-for-trading which will require them to be measured at fair value at each period end with changes in fair value included in the consolidated statement of operations in the period in which they arise. Currently there is not an active market for the replacement notes. Until a market develops for these notes, the fair value will be determined using a probability weighted discounted cash flow considering the best available public information regarding market conditions and other factors that a market participant would consider for such investments. As at March 31, 2009 and December 31, 2008, the Company has estimated the fair value of the notes at $1,288,000. No gain or loss was recorded on the exchange of ABCP for the replacement notes.

(c) On December 30, 2008 the Company sold all of its interests in certain lands, wells, pipelines and other associated equipment located in the Palo Duro Basin area of Texas. In exchange, Pearl received 18,756,414 common shares of Tyner Resources Ltd. These shares are valued at a price of $0.03. The share price was calculated by using the weighted average share price for the five days before and after the transaction date. This investment represents 26.4% of the outstanding shares of Tyner and is subject to equity accounting as significant influence exists.

6. PETROLEUM AND NATURAL GAS PROPERTIES

 
                                                             March 31, 2009
                            -----------------------------------------------
                                            Accumulated
                                       depreciation and
                                Cost          depletion      Net book value
Petroleum and natural gas
 properties                 $622,798           $201,141            $421,657
Office equipment               2,953                849               2,104
                            -----------------------------------------------
                            $625,751           $201,990            $423,761
                            -----------------------------------------------
 
                                                          December 31, 2008
                            -----------------------------------------------
                                            Accumulated
                                       depreciation and
                                Cost          depletion      Net book value
Petroleum and natural gas
 properties                 $600,297           $180,581            $419,716
Office equipment               2,739                791               1,948
                            -----------------------------------------------
                            $603,036           $181,372            $421,664
                            -----------------------------------------------
 

The depletion and ceiling test calculations have excluded the cost of unproved properties of $38.9 million (December 31, 2008 - $31.1 million) and included future development costs of $34.6 million (December 31, 2008 - $34.7 million).

The Company performed the ceiling test calculations at March 31, 2009 to assess whether the carrying value of the petroleum and natural gas properties were recoverable. A writedown in the amount of $1.1 million of the US assets has been included in depletion, depreciation and accretion in the Company's March 31, 2009 financial statements.

7. BANK CREDIT FACILITY

The Company has a credit facility with a Canadian chartered bank which is comprised of a $37 million revolving 364-day extendible term facility, and a $10 million demand revolving operating facility. The Company may borrow, repay and re-borrow advances with the aggregated outstanding not to exceed the total credit facility. The facility bears interest at the bank prime rate, banker's acceptance or LIBOR loan rates plus applicable margins and is secured by a general securities agreement. At March 31, 2009, there were no advances outstanding under this facility.

The facility is subject to annual reviews. The next scheduled review will take place on May 31, 2009.

8. ASSET RETIREMENT OBLIGATION

The total future asset retirement obligation was estimated based on the Company's net ownership interest in all wells and facilities, the estimated costs to abandon and reclaim the wells and facilities and the estimated timing of the costs to be incurred in future periods. The total undiscounted amount of the estimated cash flows required to settle the asset retirement obligations is approximately $37.1 million which will be incurred over the next 28 years with the majority of costs incurred between 2010 and 2024.

A credit adjusted risk-free rate of 6.5 percent and an inflation factor of 2 percent was used to calculate the fair value of the asset retirement obligation.

Changes to the asset retirement obligation were as follows:

 
                                                          2009         2008
                                                   -----------  -----------
Asset retirement obligation at beginning of period $    20,064  $    16,586
Liabilities acquired through acquisitions, net of
 dispositions                                            3,023       (6,464)
Liabilities incurred during the period                       -          896
Adjustment for change in reserve life, abandonment
 costs, inflation and discount rates                         -        8,545
Actual remediation costs                                  (174)        (668)
Accretion                                                  344        1,169
---------------------------------------------------------------------------
Asset retirement obligation at end of period       $    23,257  $    20,064
---------------------------------------------------------------------------
 

9. RELATED PARTY TRANSACTIONS

During the three months ended March 31, 2009 the Company entered into the following transactions with related parties in the normal course of business, which are recorded at the exchange amount established and agreed to by the related parties:

The Company paid $45 (2008 - $45) to Namdo Management Services Ltd. ("Namdo") for executive and support services pursuant to a services agreement. Namdo is a private corporation owned by Lukas H. Lundin, a director of the Company.

10. SHARE CAPITAL

(a) Authorized:

The Company is authorized to issue an unlimited number of common shares.

(b) Common Shares Issued:

 
                                                     Number of   Attributed
                                                        Shares        Value
---------------------------------------------------------------------------
Balance as at December 31, 2008 and December 31,
 2007                                              189,241,716  $   723,122
Shares issued for BlackCore acquisition (note 4)    17,600,000       10,560
Shares issued for property acquisitions              2,500,000        1,500
---------------------------------------------------------------------------
Balance as at March 31, 2009                       209,341,716  $   735,182
---------------------------------------------------------------------------
 

(c) Warrants Outstanding:

 
---------------------------------------------------------------------------
 
                                                                   Weighted
                                                                    average
                                                                   exercise
                                                     Number of        price
                                                      warrants    per share
---------------------------------------------------------------------------
Outstanding at December 31, 2008                             0  $      0.00
Issued Class A on BlackCore Acquisition (note 4)     5,000,160         0.60
---------------------------------------------------------------------------
Issued Class B on BlackCore Acquisition (note 4)     5,000,160         0.60
---------------------------------------------------------------------------
Outstanding at March 31, 2009                       10,000,320  $      0.60
---------------------------------------------------------------------------
 

Each warrant allows the holder to acquire, on or before January 13, 2013, one Pearl share for a price of $0.60 when the Company's share price reaches a volume weighted average price for 30 consecutive days of $1.50 (Class A warrants) and $2.00 (Class B warrants).

(d) Stock Options Outstanding

The Company has a stock option plan (the "Plan") available to directors, officers, consultants and employees of the Company and its subsidiaries. Under the Plan, the number of common shares to be reserved and authorized for issuance pursuant to options granted under the Plan cannot exceed ten percent of the total number of issued and outstanding shares in the Company. All issued stock options have terms of two to five years, vest over periods of up to three years and both the term and the vesting period are determined at the discretion of the board of directors. The stock options are exercisable at the market prices of the shares on the dates that the options were granted.

The continuity of stock options issued and outstanding is as follows:

 
---------------------------------------------------------------------------
 
                                                                   Weighted
                                                                    Average
                                                     Number of     Exercise
                                                       Options     Price ($)
---------------------------------------------------------------------------
Outstanding at December 31, 2008                    11,138,436         2.16
Granted                                              2,110,500         0.63
Forfeit                                             (1,249,667) $      3.00
---------------------------------------------------------------------------
Balance, end of the period                          11,999,269  $      1.81
---------------------------------------------------------------------------
 

The following stock options were outstanding at March 31, 2009:


                        Options Outstanding            Options Exercisable
--------------------------------------------------------------------------
                         Weighted- Weighted-            Weighted- Weighted-
Range of                  Average   Average              Average   Average
Exercise                 Exercise      Life             Exercise      Life
Prices ($)       Number  Price ($)   (Years)    Number  Price ($)   (Years)
--------------------------------------------------------------------------

0.40 - 1.50   7,140,500      0.69      4.78  1,194,509      0.69      4.84
1.51 - 3.00   2,326,166      2.23      3.95    593,333      2.53      3.73
3.01 - 4.50   1,113,603      3.88      2.45    750,936      4.03      1.96
4.51 - 5.28   1,419,000      5.11      2.78  1,086,000      5.12      2.76
--------------------------------------------------------------------------
             11,999,269      1.81      4.16  3,624,778      3.01      3.44
--------------------------------------------------------------------------

(e) Stock Based Compensation

Stock based compensation recoveries of $13,000, net of expenditures of $586,000, has been recorded in the Consolidated Statements of Operations and Deficit for the quarter ended March 31, 2009 (2008 - expense of $901,000). The fair value of common share options granted is estimated on the date of grant using the Black-Scholes option pricing model. The weighted average fair value of options granted during 2009 and the assumptions used in their determination are noted below:

 
                                                         Three
                                                        Months
                                                         Ended   Year Ended
                                                      March 31, December 31,
                                                          2009         2008
                                                   ------------------------
Weighted average fair value of stock options 
 granted (per option)                              $      0.32  $      0.73
Expected life of stock options (years)                    2.00         5.00
Volatility (weighted average)                               94%         117%
Risk free rate of return (weighted average)               0.97%        1.69%
Expected dividend yield                                      0%           0%
 
 
                                                      March 31, December 31,
(f) Contributed Surplus Continuity                        2009         2008
                                                   ------------------------
 
Balance, beginning of the period                   $    11,895  $     8,778
Stock-based compensation                                   586        3,749
Recovery of expense on forfeited stock options            (600)        (633)
Warrants issued on BlackCore acquisition                 2,200            -
                                                   ------------------------
Balance, end of period                             $    14,081  $    11,895
                                                   ------------------------
 

11. COMMITMENTS AND CONTINGENCIES

The Company enters into commitments and contractual obligations in the normal course of business, including the purchase of services, farm-in agreements, royalty agreements, operating agreements, transportation agreements, processing agreements, right of way agreements and lease agreements for vehicles.

(a) The Company has an eight-year operating lease for office space as at March 31, 2009, the payments (net of sublease proceeds) due under this lease agreement (including an estimate for operating costs) are as follows:


----------------------------------------------------------------
                                                      Subsequent
               2009    2010    2011    2012    2013      to 2013
----------------------------------------------------------------
Office rent  $1,093  $1,457  $1,525  $1,593  $1,593       $4,474
----------------------------------------------------------------

(b) The Company has contracted drilling rig services over the next four years. In the event that the Company does not utilize the minimum contracted days, the Company would be obligated to pay the rig operator a variable rate based on days not utilized under the contracts. As at March 31, 2009, the payments that would be due under the agreement (assuming no drilling days used) are as follows:

----------------------------------------------------------------
               2009    2010    2011    2012    2012   Subsequent
                                                         to 2013
----------------------------------------------------------------
Drilling      $ 319   $ 616   $ 935  $1,211   $ 319          Nil
 Contract
----------------------------------------------------------------

(c) In connection with the November, 2007 property acquisition from PetroHunter, the Company may be required to pay a performance payment of US $9.8 million in cash at such time prior to November 6, 2010 if either: (i) production from the assets reaches 5,000 barrels of oil per day; or (ii) proven reserves from the assets is greater than 50 million barrels of oil. As at March 31, 2009, there was no production from and no reserves attributable to these assets.

12. SEVERANCE BENEFITS

During the first quarter 2009, the Company realized a number of staff terminations. As a result, the Company has included severance benefits in the aggregate amount of $431,000 in general and administrative costs in the Company's financial statements. All severance benefits have been paid as at March 31, 2009.

13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

The Company is exposed to financial and market risk in a range of financial instruments including cash, accounts receivable, certain investments and accounts payable. The Company manages its risk through its policies and processes, but the Company generally has not used derivative financial instruments to manage these risks.

(a) Fair value of financial instruments

The following tables set out the Company's classification carrying amount and fair values of its financial assets and liabilities as at March 31, 2009 and December 31, 2008:


--------------------------------------------------------------------------
                                           2009                 2008
--------------------------------------------------------------------------
                                  Carrying       Fair  Carrying       Fair
                Classification      Amount      Value    Amount      Value
--------------------------------------------------------------------------
Cash and cash   Held-for-          $13,471    $13,471   $24,059    $24,059
 equivalents    trading (i)
--------------------------------------------------------------------------
Accounts        Loans and            9,664      9,664     9,536      9,536
 receivable     receivables (i)
--------------------------------------------------------------------------
Investment in   Held-for-            1,288      1,288     1,288      1,288
 MAV Notes      trading (ii)
--------------------------------------------------------------------------
Other           Available-for-           -          -     7,768      7,768
 investments    sale (iii)
--------------------------------------------------------------------------
Accounts        Other financial    (16,654)   (16,654)  (34,409)   (34,409)
 payable and    liabilities (iv)
 accrued
 liabilities
--------------------------------------------------------------------------

The fair values of financial assets and financial liabilities are calculated on the basis of information available at the balance sheet date using the following methods:

(i) The fair value of cash and cash equivalents and accounts receivable approximates their carrying amounts due to the short-term nature of the instruments.

(ii) The fair value of the Company's investment in MAV Notes is determined by a probability-weighted discounted cash flows considering the best available public information regarding market conditions and other factors that a market participant would consider for such investments.

(iii) Investment in shares of a private company are valued at fair market value based on some comparable transactions involving the issuance of additional shares of the private company.

(iv) The fair value of accounts payable and accrued liabilities approximates their carrying amounts due to the short-term nature of the instruments.

(b) Commodity price risk

Commodity price risk is the risk that future cash flows will fluctuate as a result of changes in the price of oil and natural gas. Commodity prices are impacted by world economic events that effect supply and demand, which are generally beyond the Company's control. Changes in crude oil and natural gas prices may significantly affect the Company's results of operations, costs generated from operating activities, capital spending and the Company's ability to meet its obligations. The majority of the Company's production is sold under short-term contracts, consequently Pearl is at risk to near term price movements. The Company manages this risk by constantly monitoring commodity prices and factoring them into operational decisions, such as contracting or expanding its capital expenditures program. At this time, the Company does not use derivative financial instruments to manage its exposure to this risk.

(c) Foreign currency exchange risk

The Company is exposed to risks arising from fluctuations in foreign currency exchange rates and the volatility of those rates. This exposure primarily relates to: (i) prices received for its crude oil and natural gas are primarily determined in reference to US dollars; (ii)certain expenditure commitments, deposits, accounts receivable, and accounts payable which are denominated in US dollars, and (iii) its operations in the United States. The Company manages this risk by monitoring foreign exchange rates and evaluating their effects on using Canadian or US vendors as well as timing of transactions. At this time, the Company has not entered into any fixed rate contracts. As at March 31, 2009, the Company held US$4,182,000 in cash and short-term deposits.

As at March 31, 2009, if US$ exchange rates had been $0.10 lower with all other variables held constant, after tax earnings for the period would have been approximately $185 higher, due to an increased foreign exchange gain. An equal opposite impact would have occurred to net earnings had exchange rates been $0.10 higher. The Company considers this risk to be limited and does not hedge this risk.

(d) Credit Risk

Credit risk is the risk that a third party fails to meet its contractual obligations that could result in the Company incurring a loss.

The Company's accounts receivable are primarily with oil and gas marketers and joint venture partners. Receivables from oil and gas marketers are generally collected on the 25th day of the month following production. The Company attempts to mitigate this risk by assessing the financial strength of its counterpart and entering into relationships with larger purchasers with established credit history. During the first quarter of 2009, the Company has not experienced any collection issues with its marketers. At March 31, 2009, over 67% of total accounts receivables are for accrual revenues. Receivables from joint venture partners arise when the Company conducts joint operations on behalf of its partners and invoices them for their share of costs. To mitigate the risk of non-payment from joint venture partners the Company can require partners to pay certain costs in advance as well as the Company has the ability to withhold production from partners in the event of non-payment.

The Company typically does not obtain collateral or security from its joint venture partners or oil and gas marketers. The carrying amounts of accounts receivable represent the maximum credit exposure.

As at March 31, 2009, the Company held $13.5 million in cash at various major banks throughout Canada and the USA, as well as $1.3 million in investments. At March 31, 2009, two Canadian chartered banks each held approximately 40% of our cash and short term deposits. Cash balances in excess of the Company's day to day requirements are invested at the bank in short-term deposits of less than 30 days.

(e) Interest Rate Risk

Interest rate risk refers to the risk that a financial instrument or cash flows associated with the instrument will fluctuate due to changes in market interest rates. The Company is exposed to interest rate risk in relation to interest expense on its revolving credit facility. At this time, the Company is not drawn on this facility and, as a result, the Company considers this risk to be limited. In addition, the Company is exposed to interest rate risk on its excess cash balances and certain investments.

(f) Liquidity Risk

Liquidity risk is the risk the Company is unable to meet its financial obligations as they come due. The Company uses operating cash flows, bank credit facilities and equity offerings to fund its capital requirements.

The Company manages this risk by maintaining a conservative balance sheet with minimal use of long term debt. As at March 31, 2009, the Company had a $47 million credit facility with no amounts outstanding, and a positive working capital position of $8.6 million. The Company believes it has sufficient funding from these sources to meet its foreseeable obligations. The maturity dates for the Company's financial liabilities are as follows:

 
---------------------------------------------------------------------------
                                          less than   6 months-1
                                           6 Months         Year  1-2 Years
---------------------------------------------------------------------------
Accounts payable and accrued liabilities    $16,654           -           -
---------------------------------------------------------------------------
 

Subsequent to March 31, 2009 the Company entered into an agreement to issue additional common shares for gross proceeds of $46 million (See note 15) which will initially be used to augment working capital, but ultimately will be used to fund the Company's capital expenditure programs.

(g) Capital management

The Company defines capital as working capital, total debt and equity. The current capital management strategy is designed to minimize the use of long term debt and maintain positive working capital. This strategy should provide the financial flexibility to fund the Company's capital program and profitable growth opportunities. The unutilized $47 million credit facility capacity provides liquidity to the Company. This structure can be adjusted as a result of changes in economic conditions or risks associated with its oil and gas assets. During 2008, the Company elected to eliminate its existing bank debt from the sale of certain non-strategic assets. In order to maintain or adjust its capital structure, the Company may from time to time issue additional common shares. As a result of the economic global downturn access to its capital markets may be limited. In addition, the Company's credit facilities are based on its petroleum and natural gas reserves whose values are impacted by, among other things, global commodity prices. The Company will adjust it's capital spending if access to external capital sources is unavailable. In order to manage the balance in the Company's capital structure, some of the financial tests that Pearl considers is debt to equity ratios, debt to cash flow from operating activities and interest coverage tests.

Financial covenants associated with the Company's credit facility are reviewed regularly and controls are in place to maintain compliance with these covenants. The only financial covenant in the Company's credit facility is to maintain a working capital ratio of 1:1 at the end of each fiscal quarter. Working capital is defined as current assets plus unutilized credit under the credit facilities compared to current liabilities. The Company was in compliance with these covenants throughout the first quarter of 2009.

14. SEGMENTED INFORMATION

The Company presently has one reportable business segment, that being oil and gas exploration, development and production. The Company's operations are carried on in the following geographic locations:

 
                                          Three Months Ended March 31, 2009
---------------------------------------------------------------------------
---------------------------------------------------------------------------
                                           Canada        USA   Consolidated
---------------------------------------------------------------------------
Total revenues, net of royalties       $   12,802  $     144  $      12,946
 
Expenses                                   34,952      1,513         36,465
Foreign currency loss (gain)                 (373)       (80)          (453)
                                       ------------------------------------
Net income (loss) before income taxes     (21,777)    (1,289)       (23,066)
Income taxes                               (2,550)         -         (2,550)
                                       ------------------------------------
Net (loss)                                (19,227)    (1,289)       (20,516)
                                       ------------------------------------
                                       ------------------------------------
 
Segment assets                            440,272     10,564        450,836
                                       ------------------------------------
Segment petroleum and natural gas
 properties                               420,541      3,220        423,761
                                       ------------------------------------
Capital additions                      $    1,659  $   1,488  $       3,147
                                       ------------------------------------
 
                                          Three Months Ended March 31, 2008
---------------------------------------------------------------------------
---------------------------------------------------------------------------
                                           Canada        USA   Consolidated
---------------------------------------------------------------------------
Total revenues, net of royalties       $   43,636  $     379  $      44,015
 
Expenses                                   49,136        254         49,390
Foreign currency gain                          (4)       (31)           (35)
                                       ------------------------------------
Income (loss) before income taxes          (5,496)       156         (5,340)
Income taxes (recovery)                    (1,559)         9         (1,550)
                                       ------------------------------------
Net income (loss)                          (3,937)       147         (3,790)
                                       ------------------------------------
                                       ------------------------------------
 
Segment assets                            529,679     54,558        584,237
                                       ------------------------------------
Segment petroleum and natural gas
 properties                               471,534     49,801        521,335
                                       ------------------------------------
Capital additions                      $   13,395  $   4,117  $      17,512
                                       ------------------------------------

15. SUBSEQUENT EVENTS

On April 20, 2009 the Company issued 52,334,000 special warrants of Pearl at a price of $0.88 per special warrant for aggregate gross proceeds of $46 million. Each special warrant is convertible into one common share of the Company.

16. COMPARATIVE FIGURES

Certain comparative figures have been reclassified to conform to the presentation adopted in 2009.

Forward-looking statements: This document contains statements about expected or anticipated future events and financial results that are forward-looking in nature and as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, the regulatory process and actions, technical issues, new legislation, competitive and general economic factors and conditions, the uncertainties resulting from potential delays or changes in plans, the occurrence of unexpected events, and the Company's capability to execute and implement its future plans. Actual results may differ materially from those projected by management. For such statements, we claim the safe harbour for forward-looking statements within the meaning of the Private Securities Legislation Reform Act of 1995.

Pearl's Certified Advisor on First North is E. Ohman J:or Fondkommission AB.

Company Registration Number: 409596-1

The report for the quarter ending June 30, 2009 will be published on or before August 14, 2009



FOR FURTHER INFORMATION PLEASE CONTACT:

Pearl Exploration and Production Ltd.
John Festival
President and Chief Executive Officer
(403) 215-8313
john.festival@pxx.ca
or
Pearl Exploration and Production Ltd.
Don Cook
Chief Financial Officer
(403) 215-8313
(403) 265-8324  (FAX)
don.cook@pxx.ca
www.pearleandp.com
 
 

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