Corval quarterly report march 2013 final

Corval Energy Ltd.

QUARTERLY REPORT

FOR THE THREE MONTHS ENDED MARCH 31, 2013

Corval Energy Ltd. President’s Message For the three months ended March 31, 2013

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PRESIDENT’S MESSAGE Fellow Shareholders, I am pleased to present the Financial Statements and MD&A for the quarter ended March 31, 2013 for Corval Energy Ltd. (the "Company" or "Corval"). These materials are being emailed to all shareholders but can also be found on our website at www.corvalenergyltd.com . If you would like a hard copy mailed to you please contact us at [email protected]. The first quarter of 2013 was a very busy operational quarter for Corval. We drilled 5 wells – 3 Bakken and 2 Lodgepole and completed and brought on production 3 Lodgepole and 2 Bakken wells for a total capital expenditure of $8.7 million. The wells were put on production through the month of March and for the quarter we averaged 318 barrels of oil per day with associated cash flow of $876,000 for the quarter. In April we produced approximately 600 barrels of oil per day. There are currently road bans in place which have suspended our drilling program. We will begin drilling once road bans in Manitoba are lifted which are expected to be in early June. For the balance of the year we have a total of 12 new drills planned, the completion of the Bakken well drilled in the first quarter and the installation of an oil treater and associated water disposal line at the oil battery. The installation of the oil treater and water disposal line are expected to reduce trucking costs for the Company. Subsequent to March 31, 2013, we completed the disposition of non-core assets in Manitoba for $1.9 million and acquired core assets in Manitoba for approximately $3.3 million, increasing our key lands and providing additional drilling locations in the area. Capital expenditures for the year 2013 are expected to be approximately $30.7 million with an exit rate of approximately 1,000 barrels of oil per day. Corval continues to be in a relatively strong financial position, with funds available through our equity line, bank lines and cash flow. This will allow us to implement our 2013 capital program, as well as allowing sufficient financial flexibility to take advantage of additional opportunities that may arise in our focus area. We will continue to update you on our progress with quarterly financials, which will be posted on the website. Sincerely,

Tom Stan President & CEO CORVAL ENERGY LTD.

http://www.corvalenergyltd.com/

mailto:[email protected]

Corval Energy Ltd. Management Discussion and Analysis For the three months ended March 31, 2013

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Management’s Discussion and Analysis Three months ended March 31, 2013

May 24, 2013

1593683 Alberta Ltd. (the “Company” or “Corval”) was incorporated as a shelf company on March 15, 2011,

and remained inactive until acquired by a current director of Corval on November 30, 2011. On May 15, 2012,

the Company changed its name to Corval Energy Ltd. On October 17, 2012, the Company entered into a Plan

of Arrangement with Foundation Group Capital Trust, whereby it exchanged shares of the Company for trust

units of Foundation Group Development Trust (“FGDT”) held by Foundation Group Capital Trust, and

subsequently, Foundation Group Capital Trust then distributed these shares to its unitholders. Through the Plan

of Arrangement, the subsidiaries of FGDT were dissolved and the assets and liabilities were assumed by Corval.

Financial and Operations Overview

For the three months ended March 31, 2013

(thousands of dollars except per share amounts and shares outstanding)

Three months ended

March 31, 2013

($000s)

Cash Flow from operations * $876

Net loss $(639)

Average production (boe/d) 318 boe/d

Working capital deficit $(5,100)

Capital expenditures $000s

Exploration and evaluation $275

Land and seismic 234

Drill and complete 6,909

Property acquisitions -

Equipment, facilities and other 1,526

$8,944

Common shares o/s at period-end (000’s) 46,034

* before changes in non-cash working capital


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HIGHLIGHTS

Corval continued with its capital program drilling 5 additional wells, and completing and tying in 5 of the

6 wells

Renegotiated a new bank facility in February, 2013 for $9.0 million

Corval exited April, 2013 in excess of 600 bopd, up from 221 bopd at the year end of 2012. Please note

that the amounts include flush production from new wells which will decline. Production stabilizes

approximately 90 days after completion.

The Company has a capital budget for the second half of 2013 for $16.5 million, which includes drilling

12 (9.5 net) wells.

This drilling program will commence after breakup, expected to be in early June, 2013.

ADVISORIES

Management’s discussion and analysis (“MD&A”) and results of operations should be read in conjunction with

the interim consolidated financial statements for the three months ended March 31, 2013, and the consolidated

financial statements for the year ended December 31, 2012. Barrels of oil equivalent (“boe”) may be

misleading as boes are based on a relative energy content conversion of six thousand cubic feet (“mcf”) of

natural gas to one equivalent barrel (“bbl”) of oil (6 mcf = 1bbl) when measured at burner tip and does not

represent a value equivalency at the wellhead. Production volumes reported are the Company’s interest before

royalties, and all amounts are expressed in Canadian dollars, unless otherwise stated.

The financial data presented has been prepared in accordance with Canadian Generally Accepted Accounting

principles (“GAAP”), which are based on International Financial Reporting Standards (“IFRS”). Additional

terms used in this Management Discussion and Analysis are “funds from operations” or “funds used in

operations”, and “netback”. Funds from operations are presented for information purposes only, and should not

be considered an alternative to, or more meaningful than, cash flow from operating activities as determined by

GAAP. Corval determines funds from operations to be the cash flow before changes in non-cash working

capital. Management believes that in addition to net earnings, funds from operations is a useful supplemental

measure to assess the financial performance and the ability of Corval to finance future growth through capital

investment. In addition, management uses netback to analyze operating performance and leverage. Netback

equals total revenue less royalties, operating costs and transportation costs calculated on a per boe basis.

Forward-looking information

Certain information set forth in this document, including management’s assessment of future plans and

operations, contains forward-looking statements. By their nature, forward-looking statements are subject to

numerous risks and uncertainties, many of which are beyond management’s control. Those risks include,

without limitation, the effect of general economic conditions, risks associated with oil and gas exploration,

development, production, marketing and transportation, loss of markets, the fact that the Company does not

operate all of its properties, industry conditions and competition, volatility of commodity prices, currency

fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry

participants, the ability to access qualified personnel and oilfield services, decisions by regulators and the ability

to access sufficient capital from internal and external sources. Readers are cautioned not to place undue

reliance on the forward-looking statements as the assumptions used in the preparation of such information,

although considered reasonable at the time of preparation, may prove to be imprecise. Actual results,

performance or achievements could materially differ from those expressed or implied in such forward-looking

statements and accordingly, no assurance can be given that any of the events anticipated by forward looking

statements will transpire or occur, or if any of them do so, what benefit the Company will derive therefrom.


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Specific forward-looking statements include the following: Corval’s business strategy and focus, capital

expenditure budget, drilling plans, future debt levels, operating costs, and other financial results, source of

funding of the Company’s capital program, tax pools, future production, and decline rates.

OVERVIEW OF PERFORMANCE AND DISCUSSION OF OUTLOOK

Summary

Corval has continued its drilling activity during the three months ended March 31, 2013.

The Manitoba properties, producing light, sweet crude oil (38° API oil), had production of approximately 240

bopd at the end of 2012. During the last quarter of 2012 and the first three months of 2013, Corval drilled six

wells, and completed, equipped, and tied-in five of those wells, exiting the quarter with over 600 bopd.

During the three months ended March 31, 2013, Corval used the net proceeds from its 2012 financing to repay

$545,193 of promissory notes, including accrued and unpaid interest, and $7,450,000 of bank debt. The

remaining $17.1 million of the line of equity financing is available upon request by the Company to support

future capital requirements, and $8.0 million was called in April, 2013. The proceeds of the financing will

continue to be used primarily to drill development wells in Manitoba.

Corval had a line of $8.0 million, negotiated in the fall of 2012. In February, 2013, Corval was able to

renegotiate its line of credit to $9.0 million with National Bank of Canada. As Corval’s production increases,

the Company anticipates this line of credit will increase.

Results of Operations – First Quarter of 2013

Although Corval had been incorporated in 2011, Corval formally commenced operations in October, 2012.

Therefore, the interim consolidated financial statements and the Management’s Discussion and Analysis reflect

operations only after October 2012, and as a result, no comparative information has been provided.

Average daily sales volumes were 318 bopd for the first three months of 2013. Revenues, comprised entirely of

oil sales, were $2,451,289, representing average price of $85.75 per bbl.

For the three months ended March 31, 2013, the Company had a net loss of $639,408. The Company incurred

capital expenditures of $8,943,517, primarily related to drilling, completing, equipping, and tying-in five wells

in the Sinclair area of Manitoba.

Funds from operations for first three months of 2013 were $875,690 an increase of $1,164,323 from the fourth

quarter of 2012 reflecting the increase in production.


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OUTLOOK

Capital Expenditure Program - 2013

Early in 2013, the Company presented a drilling plan to its new Board of Directors. This capital program of

$12.8 million for the first six months of 2013 was approved, and included drilling 5 horizontal wells,

completing 5 wells and up to $1.5 million for land acquisitions in the area. Upon approval, Corval continued

the program that was started in late 2012, by drilling the 6 wells and accelerating the program by completing 5

of these wells. Although it is early, the initial results are encouraging, as Corval has seen its production

increase from the initial base of 240 bopd to over 600 bopd in April. We do not expect this rate to continue, as

these horizontal wells have very steep decline rates of over 50% in the first year of production. Based on these

initial results, Corval’s Board of Directors approved a budget of $16.5 million for the remainder of 2013. This

includes drilling up to 12 wells. Based on this, Corval expects to drill immediately after breakup, which is

expected to be in early June.

Corval is now well positioned to move forward and grow in 2013. Production at the end of April, 2013 with the

new wells on-stream, is in excess of 600 bbl/d, and going forward should generate positive funds from

operations.

Corval is in a unique position for a junior/emerging oil company as it is now:

i) Well financed with cash after raising a $33.2 million line of equity in 2012,

ii) generating solid cash flow, with light oil that provides netbacks that are currently over $45.00 per bbl,

iii) well-positioned with a strong management team, directors and major investors to take advantage of

additional opportunities that will arise in Western Canada, and

iv) starting to capitalize on the potential of its significant multi-zone light oil resource plays in Manitoba.

IMPACT OF CURRENT ECONOMIC VOLATILITY AND UNCERTAINTY

Crude oil prices have recovered through the early months of 2013, and the Company has access to over $17

million through a line of equity. Corval is therefore in a position to undertake its planned capital expenditures

program. The Company will continue to monitor its funds from operations and available balance on the line of

equity, and available credit facilities to ensure its ability to meet its planned capital program for 2013 and

beyond.

RESULTS OF OPERATIONS

The following tables summarize various aspects of producing properties for the first three months of 2013.

Production

Three months ended March 31 2013

Oil, condensate, & ngls – bbls/d

318

Production of 318 bbls/d for the first quarter of 2013 increased from 221 bbls/d during the fourth quarter of

2012 as a result of additional production from the new wells drilled.


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Revenue


Sales - oil $ 2,451,289

Average price

Oil ($/bbl)

$ 85.75

The Company’s crude oil production is light, sweet oil with an API of 38 degrees.

Royalties


Crown royalties

Freehold royalties

Overriding royalties

$ 3,751

335,553

30,314

Total royalties $ 369,618

Per boe

Percentage of revenues $ 12.93

15.1%

Most of the Company’s production is from freehold lands, which have royalty rates of between 12.5% and 18%,

and provide no incentives for drilling.

Operating and transportation costs


Operating costs

Expensed workovers $ 556,887

74,779

Total operating costs $ 631,666

Per bbl

Operating costs

Expensed workovers

Total operating costs

$ 19.48

$ 2.62

$ 22.10

The operating costs averaged $22.10 per bbl for the three months ended March 2013, which consists of $19.48

for regular operating costs and $2.62 per bbl for expensed workovers. The workovers for 2013 included

bottomhole pump and tubing repairs at Sinclair wells 2-33 and 5-33. These workovers are a continuation of

Corval’s program to complete maintenance projects that the previous owner was unable to perform. The

operating costs per bbl going forward are expected to decrease as the Company brings on new production

during the year.

Operating netbacks


Per boe

Revenues

Royalties

Operating costs

$ 85.75

(12.93)

(19.48)

Netback per boe before workovers $ 53.34

Workovers (2.62)

Netback per boe $50.72


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Netbacks for the Manitoba properties are generally greater than industry average due to strong prices for the

light sweet crude, combined with reasonable operating costs of approximately $20.00 per bbl, excluding

workovers. The Company expects that trend to continue.

General and administrative expenses


Human resources costs (salaries and benefits)

Professional fees

Occupancy costs

Office supplies, software, and services

Shareholder reporting

Travel

Miscellaneous general and administrative

Overhead recoveries

$ 422,892

75,331

111,494

101,826

7,042

5,859

1,380

(151,507)

Total $ 574,317

Depletion and depreciation


Total depreciation, depletion, and impairment

$992,206

Funds used in operations and net loss


Funds from operations

$/share - basic

Net loss

$/share - basic

$ 875,690

$0.02

$(639,408)

$(0.01)

Capital Expenditures


Land purchases

Geological and geophysical

Drilling and completion

Equipping and facilities

Other

$ 241,227

267,737

6,909,146

1,514,713

10,694

Total cash expenditures

Less: Exploration and evaluation expenditures $ 8,943,517

(275,217)

Total: Property, Plant, and equipment expenditures $ 8,668,300


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Capital expenditures were $275,217 for exploration and evaluation assets and $8,668,300 for developed and

producing assets for the three months ended March 31, 2013. Corval drilled, completed, equipped, and tied-in

five wells as part of the capital program in Sinclair, Manitoba, costs of which are included in property, plant,

and equipment expenditures.

SUMMARY OF QUARTERLY FINANCIAL DATA

The following table summarizes quarterly financial results:

Quarter

ended

Mar-13

$

Dec-12

$

Sep-12

$

Jun-12

$

Mar-12

$

Dec-11

$

Sept-11

$

Jun-11

$ Petroleum

and natural gas sales

2,451,289

1,364,553

-

-

-

-

-

-

Funds from

(used in)

operations 875,690 (361,877) - - - - - -

Income

(loss) (639,408) (8,474,535) - - - - - -

Production

bopd

318

221

-

-

-

-

-

-

Average

price/bbl

$85.75

$82.39

$0.00

$0.00

$0.00

$0.00

$0.00

$0.00

LIQUIDITY AND CAPITAL RESERVES

The Company started 2013 with a working capital surplus of $2,802,567, which included the remaining

promissory notes of $568,828 owing. The Company raised $145,600 through the issue of 208,000 shares

through a private placement in February 2013. Promissory notes, valued at $545,193, were repaid during the

first three months of 2013, as well as the bank loan of $7,450,000. The Company drilled, completed, equipped,

and tied-in five wells of its 2013 capital program during the quarter, which comprised the majority of the

$8,668,300 in property, plant, and equipment expenditures for the quarter. The Company closed the year with a

working capital deficit of $5,124,552 at March 31, 2013, which includes the remaining promissory notes of

$24,761 owing. On April 5, 2013, the Company requested an $8 million from the line of equity, which resulted

in $7,520,000 in proceeds net of share issuance costs from the sale of 11,428,571 shares.


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The Company monitors its capital program based on available funds, which is the combination of working

capital, the line of equity, and remaining unused bank loan, as calculated below:

March 31, 2013

$

Current assets 2,618,976

Accounts payable and accrued liabilities (7,718,767)

Promissory notes (24,761)

Net working capital (5,124,552)

Maximum value of bank loan

Amount drawn

9,000,000

-

Unutilized bank loan 9,000,000

Total available line of equity

Amount drawn to March 31, 2013

31,000,000

(13,950,000)

Unutilized line of equity 17,050,000

Net available funds 21,025,448

The Company’s 2013 capital program was presented to the Board of Directors in 2012, and the first half of

2013 capital program of $12.8 million was approved in January, 2013, of which approximately $9.0 million was

expended to March 31, 2013. Management recently obtained board approval for the second half of 2013

Capital Program of $16.5 million. The Company expects the current available funds, bank loan, line of equity,

and anticipated cash flow will be able to fund its full capital program for 2013.

During the three months ended March 31, 2013, the Company negotiated a new bank loan with a Canadian

financial institution for $9.0 million, bearing an interest rate of the Bank Prime Rate plus 0.75%. The credit

facility is subject to a periodic review, the next of which is scheduled for June 1, 2013. No funds have been

withdrawn from this bank loan to date.

The amount of the bank loan is based on petroleum and natural gas reserves with certain financial covenants.

The bank loan also contains a financial covenant that requires the Company to maintain a certain minimum

working capital ratio. The Company is compliant with all covenants.

SHARE DATA

Transactions regarding Corval’s shares, options, acquisition warrants and performance warrants are presented in

the interim consolidated financial statements as at March 31, 2013, and the consolidated financial statements at

December 31, 2012.

On April 5, 2013, the Company called another draw on its line of equity of 11,428,571 shares for proceeds of

approximately $8 million. The Company has 57,462,482 shares outstanding as of the date of this MD&A.


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EVENTS AFTER REPORTING PERIOD

Share issues

On April 5, 2013, the Company called another draw on its line of equity of approximately 11,428,571 shares for

proceeds of approximately $8 million.

Financial hedge

Subsequent to the year end, the Company entered into a financial transaction from May 1, 2013 to December

31, 2013 to fix the price of 100 bbl/d of oil at $90.02/bbl at Edmonton.

Lawsuit

The Company filed a statement of claim for $730,000 with the Court of Queen’s Bench of Alberta on behalf of

its predecessor companies regarding the improper diversion of funds against a former trustee of Foundation.

There can be no assurance of a favorable judgment at this time.

Property disposition

The Company sold its working interest in two non-core wells in Manitoba in April, 2013. Proceeds of the

disposition were $1.9 million.

Property acquisition

The Company purchased an interest in land and several wells in Manitoba in May, 2013 for approximately $3.3

million.

TRANSACTIONS WITH RELATED PARTIES

The corporate secretary is a partner in a law firm that provides legal services to the Company. For the three

months ended March 31, 2013, the Company recorded $66,300 in general and administrative expenses related

to this law firm. At March 31, 2013, $66,300 remained in accounts payable and accrued liabilities.

COMMITMENTS

The Company is carrying a lease on its office space, and another lease on the space of FGDT which expires on

July 31, 2013:

Total at

March 31, 2013

$

2013

2014-2018

2019-2022

129,351

760,461

494,711

Total 1,384,523


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RISK FACTORS

Investors should carefully consider the risk factors set out below and consider all other information

contained herein. Additional risks and uncertainties not currently known to the management of the

Company may also have an adverse effect on the Company's business and the information set out below does

not purport to be an exhaustive summary of the risks affecting the Company.

Project Risks

The Company will manage a variety of small and large projects in the conduct of its business. Project delays

may delay expected revenues from operations. Significant project cost over-runs could make a project

uneconomic. The Company's ability to execute projects and market oil and natural gas will depend upon

numerous factors beyond the Company's control, including:

the availability of drilling and related equipment;

the availability of processing capacity;

the availability and proximity of pipeline capacity;

the availability of storage capacity;

the supply of and demand for oil and natural gas;

the effects of inclement weather;

unexpected cost increases;

accidental events;

the availability and productivity of skilled labour; and

the regulation of the oil and natural gas industry by various levels of government and governmental

agencies.

Because of these factors, the Company could be unable to execute projects on time, on budget or at all, and may

not be able to effectively market the oil that it produces.

Availability of Drilling Equipment and Access

Oil and natural gas exploration and development activities are dependent on the availability of drilling and

related equipment (typically leased from third parties) in the particular areas where such activities will be

conducted. Demand for such limited equipment or access restrictions may affect the availability of such

equipment to the Company and may delay exploration and development activities. To the extent the Company

is not the operator of its oil and gas properties, the Company will be dependent on such operators for the timing

of activities related to such properties and will be largely unable to direct or control the activities of the

operators.

Legal Proceedings

The Company may from time to time be subject to litigation and regulatory proceedings arising in the normal

course of its business. The Company cannot determine whether such litigation and regulatory proceedings will,

individually or collectively, have a material adverse effect on its business, results or operations and financial

condition. To the extent expenses incurred in connection with litigation or any potential regulatory proceeding

or action (which may include substantial fees of attorneys and other professional advisors and potential

obligations to indemnify officers and directors who may be parties to such actions) are not covered by available

insurance, such expenses could adversely affect the Company's cash position.

Environmental Risks

All phases of the oil and natural gas business present environmental risks and hazards and are subject to

environmental regulation pursuant to a variety of international conventions and international, national,

provincial, state and local law and regulation. Environmental legislation provides for, among other things,

restrictions and prohibitions on spills, releases or emissions of various substances produced in association with


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oil and gas operations. The legislation also requires that wells and facility sites be operated, maintained,

abandoned and reclaimed to the satisfaction of applicable regulatory authorities. Compliance with such

legislation can require significant expenditures and a breach of same can result in the imposition of clean-up

orders, fines and/or penalties, some of which may be material, as well as possible forfeiture of requisite

approval obtained from the various governmental authorities. The discharge of GHG emissions and other

pollutants into the air, soil or water may give rise to liabilities to governments and third parties and may require

the Company to incur costs to remedy such discharge. Although the Company believes that it is in material

compliance with current applicable environmental regulations, no assurance can be given that environmental

laws will not result in a curtailment of production or a material increase in the costs of production, development

or exploration activities or otherwise adversely affect its financial condition, results of operations or prospects.

Permits, Licences and Approvals

The Company's properties are held in the form of licences and leases and working interests in licences and

leases. If the Company or the holder of the licence or lease fails to meet the specific requirement of a licence or

lease, the licence or lease may terminate or expire. There can be no assurance that any of the obligations

required to maintain each licence or lease will be met. The termination or expiration of the Company's licences

or leases or the working interests relating to a licence or lease may have a material adverse effect on its results

of operations and business.

Land Tenure

Crude oil and natural gas located in the Canadian western provinces is owned predominantly by the respective

provincial governments. Provincial governments grant rights to explore for and produce oil and natural gas

pursuant to leases, licences and permits for varying terms and on conditions set forth in provincial legislation

including requirements to perform specific work or make payments. Oil and natural gas located in such

provinces can also be privately owned and rights to explore for and produce such oil and natural gas are granted

by lease on such terms and conditions as may be negotiated.

Hedging

The Company may enter into agreements to receive fixed prices on its oil and natural gas production to offset

the risk of revenue losses if commodity prices decline; however, if commodity prices increase beyond the levels

set in such agreements, the Company will not benefit from such increases and the Company may nevertheless

be obligated to pay royalties on such higher prices, even though not received by it, after giving effect to such

agreements. Similarly, from time to time the Company may enter into agreements to fix the exchange rate of

Canadian to United States dollars in order to offset the risk of revenue losses if the Canadian dollar increases in

value compared to the United States dollar; however, if the Canadian dollar declines in value compared to the

United States dollar, the Company will not benefit from the fluctuating exchange rate.

Exploration, Development and Production Risks

Oil and natural gas exploration involves a high degree of risk, which even with a combination of experience,

knowledge and careful evaluation the Company may not be able to overcome. There is no assurance that

expenditures made on future exploration by the Company will result in new discoveries of oil in commercial

quantities. It is difficult to project the costs of implementing a drilling program due to the inherent uncertainties

of drilling in unknown formations, the costs associated with encountering various drilling conditions such as

over pressured zones and tools lost in the hole, the availability of adequately trained and experienced

contractors, and changes in drilling plans and locations as a result of prior exploratory wells or additional

seismic data and interpretations thereof.

The long-term commercial success of the Company depends on its ability to find, acquire, develop and

profitably produce oil and natural gas reserves. No assurance can be given that the Company will be able to

continue to locate satisfactory properties for acquisition or participation. Moreover, if such acquisitions or

participations are identified, the Company may determine that current markets, terms of acquisition and

participation or pricing conditions make such acquisitions or participations uneconomic.


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Future oil and gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are

productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs.

Completion of a well does not assure a profit on the investment or recovery of drilling, completion and

operating costs. In addition, drilling hazards or environmental damage could greatly increase the cost of

operations, and various field operating conditions may adversely affect the production from successful wells.

These conditions include delays in obtaining governmental approvals or consents, shut-ins of connected wells

resulting from extreme weather conditions, insufficient storage or transportation capacity or other geological

and mechanical conditions. While diligent well supervision and effective maintenance operations can

contribute to maximizing production rates over time, production delays and declines from normal field

operating conditions cannot be eliminated and can be expected to adversely affect revenue and cash flow levels

to varying degrees.

In addition, oil and gas operations are subject to the risks of exploration, development and production of oil and

natural gas properties, including encountering unexpected formations or pressures, premature declines of

reservoirs, blow-outs, cratering, sour gas releases, fires and spills. Losses resulting from the occurrence of any

of these risks could have a materially adverse effect on future results of operations, liquidity and financial

condition.

Recent economic risks

Many oil and natural gas producers are encountering difficult times with low natural gas prices and increasing

differentials on crude oil prices, and in accessing new equity capital, while credit conditions and availability

may tighten despite low interest rates. Corval is positioned 100% in exploring and producing crude oil, which

has maintained stronger pricing over the last few years. Crude oil pricing has been volatile due to world supply

and demand factors, bottlenecks in North American transportation from production areas to refining areas.

These factors have resulted in wider differentials between prices on the world market based on Brent pricing

index, West Texas Intermediate (WTI) which is the North American benchmark, and Edmonton Par price, the

Canadian benchmark price for light sweet crude oil. These factors, including volatile differentials is expected to

continue in the near future.

Access to capital The Company is dependent on access to equity or debt financing to fund working capital requirements and

capital expansion programs when operating cash flows are not sufficient to do so. To date, sufficient capital has

been obtained to meet the Company’s working capital and capital expansion requirements. Additional working

capital requirements or further capital expansion that cannot be funded through operating cash flows or current

cash on hand will require external financing, the availability of which is dependent on, for example, credit

availability, economic conditions, and commodity prices.

Additional risk factors may be found in the interim consolidated financial statements at March 31, 2013 in note

13, in the consolidated financial statements at December 31, 2012 in notes 3 and 17.

FINANCIAL INSTRUMENTS

The financial instruments are described in Note 13 in the interim consolidated financial statements as at March

31, 2013, and in Note 17 in the consolidated financial statements at December 31, 2012.


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CRITICAL ACCOUNTING ESTIMATES

A summary of Corval’s use of accounting estimates and judgments are summarized in Note 2 of the audited

consolidated financial statements at December 31, 2012, and the policies for these accounting estimates

continued through the three months ended March 31, 2013. The preparation of interim consolidated financial

statements in conformity with IFRS requires management to make judgments, estimates and assumptions that

affect the application of accounting policies and the reported amounts of assets, liabilities, income and

expenses, and the accompanying disclosures. Estimates and underlying assumptions are reviewed on an

ongoing basis and are based on management’s experience, expectations of future events, and other factors that

are believed to be reasonable under the current circumstances. Uncertainty surrounding these assumptions and

estimates could result in outcomes where the results may differ from these estimates and may require material

adjustments to the carrying amount of the assets and liabilities into future periods.

Further information with respect to the Company can be found on its website at www.corvalenergyltd.com.

http://www.corvalenergyltd.com/

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Corval Energy Ltd.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

These unaudited interim consolidated financial statements of Corval Energy Ltd. for the three months ended March 31, 2013 have been prepared by management and authorized for distribution to the shareholders by the Board of Directors of the Company. The Company’s external auditors have not reviewed these financial statements.

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CORVAL ENERGY LTD. Interim Consolidated Statements of Financial Position

As at March 31, 2013 and December 31, 2012

Note

March 31, 2013

(unaudited)

December 31, 2012

Assets Current assets:

Cash Trade and other receivables Prepaid expenses

13

$ 567,173

1,819,111 232,692

$ 12,050,366

761,679 185,201

2,618,976

12,997,246

Exploration and evaluation Property, plant and equipment

3 4

275,217

31,321,117

- 23,528,131

Total Assets

$ 34,215,310 $ 36,525,377

Liabilities and Shareholders’ Equity

Current Liabilities: Accounts payable and accrued liabilities Bank loan

5

$ 7,718,767

-

$ 2,175,851

7,450,000

7,718,767 9,625,851 Promissory notes Decommissioning obligations

6 7

24,761 1,962,715

568,828 1,807,338

Total Liabilities

$ 9,706,243 $ 12,002,017

Shareholders’ Equity

Share capital 8 33,074,958 32,929,358

Contributed surplus 8(d) 548,052 68,537

Deficit (9,113,943) (8,474,535)

Shareholders’ Equity 24,509,067 24,523,360

Total liabilities and shareholder’s equity

$ 34,215,310

$ 36,525,377

The notes are an integral part of these consolidated financial statements.

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CORVAL ENERGY LTD. Interim Consolidated Statements of Loss and Comprehensive Loss For the three months ended March 31, 2013 and March 31, 2012

Note

Three months

ended March 31, 2013

(unaudited)

Three months ended March 31,

2012

Revenues Petroleum sales Royalties

$ 2,451,289 (369,618)

$ - -

2,081,671 - Expenses Operating costs General and administrative Share-based compensation Depletion and depreciation

8

631,666 574,315 479,515 992,206

- - - -

2,677,702 -

Finance expenses 9 43,377 -

Net loss and comprehensive loss for the period

$ (639,408)

$ -


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CORVAL ENERGY LTD. Interim Consolidated Statements of Changes in Equity For the three months ended March 31, 2013 and March 31, 2012

Note

Number of common shares

Share Capital

Contributed surplus Deficit

Total Shareholders’

Equity

Balance at January 1, 2012

8 10

$ 10

$ -

$ -

$ 10

Balance at March 31, 2012 10 $ 10 $ - $ - $ 10

Balance at January 1, 2013

45,825,911

$ 32,929,358

$ 68,537

$ (8,474,535)

$ 24,523,360

Private placements Share based expense Net loss for the period

208,000 - -

145,600 - -

- 479,515

-

- -

(639,408)

145,600 479,515

(639,408)

Balance at March 31, 2013 46,033,911 $ 33,074,958 $ 548,052 $ (9,113,943) $ 24,509,067


-20-

CORVAL ENERGY LTD. Interim Consolidated Statements of Cash Flows For the three months ended March 31, 2013 and March 31, 2012

Note

Three months

ended March 31, 2013

(unaudited)


2012

Operating activities: Net loss for the period Add back: finance expense (interest disclosed in financing activities) Non-cash items: Depletion and depreciation Share based compensation

$ (639,408)

43,377

992,206 479,515

$ -

-

- -

875,690 - Net changes in non-cash working capital items 10 (657,940) -

217,750 -

Investing activities: Expenditures – property, plant, and equipment Expenditures – exploration and evaluation Net changes in non-cash working capital items

4 3 10

(8,668,300) (275,217) 5,095,933

- -

-

(3,847,584) -

Financing activities: Proceeds from share issuances, net of issue costs Repayment of promissory notes Repayment of bank loan Interest paid

8 6 5

145,600 (545,193)

(7,450,000) (3,766)

- - - -

(7,853,359) -

Decrease in cash and cash equivalents during the period

(11,483,193)

-

Cash and cash equivalents, beginning of the period

12,050,366

-

Cash and cash equivalents, end of the period

$ 567,173

$ -


- 21 -

1. Nature of operations:

1593683 Alberta Ltd. (the “Company” or “Corval”) was incorporated on March 15, 2011. On May

15, 2012, the Company changed its name to Corval Energy Ltd. On October 17, 2012, the

Company entered into a Plan of Arrangement with Foundation Group Capital Trust, whereby it

exchanged shares of the Company for trust units of Foundation Group Development Trust

(“FGDT”) held by Foundation Group Capital Trust, and subsequently, Foundation Group Capital

Trust then distributed these shares to its unitholders. Through the Plan of Arrangement, the

subsidiaries of FGDT were dissolved and the assets and liabilities were assumed by Corval.

Corval currently continues to maintain FGDT as a continuing, but inactive, subsidiary.

Corval explores for and produces oil in Alberta and Manitoba, Canada. Corval Energy Ltd. is

domiciled in Canada at Suite 2400, 500 – 4th Avenue SW, Calgary, Alberta T2P 2V6. The

distribution to the shareholders of the Company of these consolidated financial statements was

authorized by the Board of Directors on May 24, 2013.

2. Basis of preparation:

The consolidated interim financial statements have been prepared in accordance with

International Financial Reporting Standards (IFRS) as issued by the International Accounting

Standards Board (IASB). These interim consolidated financial statements have been prepared in

accordance with IFRS applicable to the preparation of interim consolidated financial statements,

including IAS 34, Interim Financial Reporting, and have been prepared following the same

accounting policies as the annual consolidated financial statements for the year ended December

31, 2012. The disclosures provided below are incremental to those included with the annual

consolidated financial statements. Certain information and disclosures included in the notes to the

annual consolidated financial statements are condensed herein or are disclosed on an annual

basis only. Accordingly, these interim consolidated financial statements should be read in

conjunction with the annual consolidated financial statements for the year ended December 31,

2012.

The policies applied in these interim consolidated financial statements are based on IFRS issued

and outstanding as of the date the Board of Directors approved the distribution of these

statements.

The Company’s presentation currency is Canadian dollars and all amounts reported are

Canadian dollars unless otherwise noted.

These unaudited interim consolidated financial statements of Corval Energy Ltd. for the three

months ended March 31, 2013 have been prepared by management and authorized for

distribution to the shareholders by the Board of Directors of the Company. The Company’s

external auditors have not reviewed these financial statements.

Corval Energy Ltd. Notes to the Consolidated Financial Statements For the three months ended March 31, 2013

-22-

3. Exploration and evaluation assets

Cost

March 31, 2013 $

Opening balance – January 1, 2013 Additions

- 275,217

Closing balance – March 31, 2013 275,217

Exploration and evaluation (“E&E”) assets consist of the Company’s undeveloped land and

exploration projects which are pending the determination of technical feasibility. For the three months

ended March 31, 2013, $275,217 of E&E assets, predominately undeveloped land acquisitions, were

added. There were no indicators of impairment at March 31, 2013. 4. Property, plant, and equipment

March 31, 2013 $

Cost Opening balance – January 1, 2013 Current period additions Changes in decommissioning liability

31,506,505 8,668,300

116,892

Closing balance – March 31, 2013 40,291,697

Accumulated depletion, depreciation, and impairment Opening balance – January 1, 2013 Current period depletion and depreciation

7,978,374 992,206


Net property, pProperty, plant, and equipment Opening balance – January 1, 2013

23,528,131


Property, plant, and equipment (“PP&E”) consist of the Company’s developed and producing assets.

PP&E additions were $8,668,300 in expenditures and $116,892 in additional decommissioning

obligations for the three months ended March 31, 2013, and were incurred through the Company’s

drilling, completing, and equipping activities as per the Company’s 2013 capital program.


-23-

Future development costs of $10,825,931 have been included in the depletable balance for the three

months ended March 31, 2013. The Company has not recognized any individual components that are

depreciated separately.

During the three months ended March 31, 2013 the Company capitalized general and administrative

expense in the amount of $96,968 consisting predominately of overhead.

There were no indicators of impairment at March 31, 2013.

5. Bank loan:

The Company had a bank loan with an outstanding balance of $7,450,000 at the end of 2012. During

the three months ended March 31, 2013, the Company repaid the $7,450,000 balance of the loan,

and secured new lending arrangements with another Canadian financial institution. The new bank

loan includes a revolving operating demand loan of a maximum of $9 million and an acquisition and

development demand loan of $2.7 million. The revolving operating demand loan bears an interest

rate of the Bank’s Prime Rate plus 0.75% and a standby fee of 0.25% on the undrawn portion. The

acquisition and development loan bears an interest rate of the Bank Prime Rate plus 1.25%, and a

standby fee of 0.25% of the undrawn portion. The new bank loan is covered by a fixed and floating

$50 million debenture over all of the assets of the Company. As at March 31, 2013, there were no

draws on either of the new loans. The Company is required to comply with a working capital financial

covenant, with the next review scheduled for June 1, 2013. 6. Promissory Notes:

The Company had promissory notes and accumulated interest of $568,828 at the end of 2012.

These notes bear a simple interest rate of 3%. The Company accrued $1,126 of additional interest

and paid $545,193 of promissory notes and interest during the three months ended March 31, 2013.

Promissory notes March 31,

2013 $

Opening balance – January 1, 2013 Additional interest accrued

568,828 1,126

Notes repaid ($540,485 plus additional interest of $4,708)

569,954 (545,193)

Closing balance – March 31, 2013 24,761

7. Decommissioning obligations:

The decommissioning provision represents the present value of decommissioning costs relating to

the Company’s interest in oil and gas properties, which are expected to be incurred up to the time

when the properties are expected to cease operations. The Company has estimated the net present


-24-

value of the decommissioning obligations to be $1,962,715 as at March 31, 2013 based on an

undiscounted total future liability of $4,340,000 discounted at a credit-adjusted rate of 8%.

Decommissioning Obligations March 31,

2013 $

Opening balance – January 1, 2013 Additions Accretion

1,807,338 116,892

38,485

Closing balance 1,962,715

8. Share capital:

At March 31, 2013, the Company was authorized to issue an unlimited number of common shares.

a) Share issues:

(i) The Company raised funds through a private placement for 208,000 common shares at $0.70

per common share for total cash proceeds of $145,600.

(ii) On April 5, 2013, subsequent to the quarter end, the Company made a call on its equity line for

11,428,571 shares at $0.70 per common share for cash proceeds of $8,000,000 with issue

costs of $480,000, for net proceeds of $7,520,000. The remaining equity line at January 1,

2013 was $17,050,000, and after this draw, now stands at $9,050,000.

b) Common share options:

During the three months ended March 31, 2013, 550,000 common share options exercisable at $0.70

per common share option, expiring in five years, were issued to employees and an independent

advisor. The continuity of common share options is detailed below:

Options

Number

Exercise price

Life (in years)

Issued and outstanding – January 1, 2013 5,455,000 $0.70 4.7

Issued to March 31, 2013 550,000 $0.70 4.8

Issued and outstanding – March 31, 2013 6,005,000 $0.70 4.7

c) Performance Warrants:

During the three months ended March 31, 2013, 210,000 performance warrants exercisable at $0.70

per common share option, expiring in five years, were issued to an independent advisor. The

continuity of performance warrants is detailed below:

Performance warrants

Number

Exercise price

Life (in years)


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Issued and outstanding – January 1, 2013 6,750,000 $0.70 4.7

Issued to March 31, 2013 210,000 $0.70 4.8

Issued and outstanding – March 31, 2013 6,960,000 $0.70 4.7

d) Contributed surplus:

The fair value at grant date is recorded as stock based compensation in profit and loss, and in

shareholders’ equity as contributed surplus, over the period of time required for the options or

warrants to vest. Stock based compensation of $479,515 was expensed during the three months

ended March 31, 2013.

9. Finance expenses:

Finance expenses


2013 $

Interest on bank loan 3,766 Interest on promissory notes (note 6) 1,126

Accretion of decommissioning liabilities (note 7) 38,485

Finance expenses total 43,377

10. Supplemental cash flow information:

Changes in non-cash working capital is comprised of:

March 31, 2013

$

Changes in: Trade and other receivables (1,057,432)

Prepaid expenses (47,491) Accounts payable and accrued liabilities 5,542,916

4,437,993

Allocated to: Operating (657,940) Investing 5,095,933

4,437,993

11. Related party:

The corporate secretary is a partner in a law firm that provides legal services to the Company. For

the three months ended March 31, 2013, the Company recorded $66,300 in general and

administrative expenses related to this law firm. At March 31, 2013, $66,300 remained in accounts

payable and accrued liabilities.


-26-

12. Capital management:

The Company considers its capital structure to include share capital, and working capital, including

the bank loan.

March 31, 2013 $

Current assets 2,618,976 Accounts payable and accrued liabilities (7,718,767) Promissory notes (24,761)

Net working capital (5,124,552)

Maximum value of bank loan (note 5) Amount drawn

9,000,000 -

Unutilized bank loan 9,000,000

Total available line of equity Amount drawn to March 31, 2013

31,000,000 (13,950,000)

Unutilized line of equity 17,050,000

Net available funds 21,025,448

The Company’s 2013 capital program was presented to the Board of Directors in 2012, and the first

half of 2013 capital program of $12.8 million was approved in January, 2013, of which approximately

$9.0 million was expended to March 31, 2013. Management recently obtained board approval for the

second half of 2013 Capital Program of $16.5 million. In April, 2013, another $8.0 million draw on the

line of equity was requested and received. The Company expects the current available funds, bank

loan, line of equity, and anticipated cash flow will be able to fund its full capital program for 2013.

During the three months ended March 31, 2013, the Company negotiated a new bank loan with a

Canadian financial institution for $9.0 million, bearing an interest rate of the Bank Prime Rate plus

0.75%. The credit facility is subject to a periodic review, the next of which is scheduled for June 1,

2013 (note 5). No funds have been withdrawn from this bank loan to date. 13. Financial risk management:

The Company’s financial assets and liabilities are comprised of cash, trade and other receivables,

accounts payable and the bank loan. The main purpose of these financial instruments is to manage

short-term cash flow and raise finances for the Company’s capital expenditure program.

The carrying value of these financial instruments approximates their fair value due to their short term

nature. Substantially all of the promissory notes were repaid (note 6), and therefore the carrying value

approximates their fair value.


-27-

The Company is exposed to a variety of financial risks arising from its exploration, development,

production, and financing activities such as:

■ credit risk;

■ liquidity risk; and

■ market risk.

Credit risk:

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial

instrument fails to meet its contractual obligations, and arises principally from the Company’s

receivables from joint venture partners and oil and natural gas marketers.

March 31, 2013 $

Amounts due from marketers Joint venture GST receivable

1,349,655 120,749 348,707

Total 1,819,111

The need for impairment of receivables is analyzed at each reporting date on an individual basis for

major clients. At March 31, 2013, no impairment was deemed necessary, so no allowance for

doubtful accounts was recognized.

As at March 31, 2013, the Company’s trade and other receivables are aged as follows:

March 31, 2013 $

Current 30 – 60 days 60 – 90 days Over 90

1,737,671 17,789 23,521 40,130

Total 1,819,111

Liquidity risk:

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall

due. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always

have sufficient liquidity to meet its liabilities when due. As disclosed in Note 12, the Company

manages its liquidity by monitoring its capital program and comparing that to its available funds.


-28-

Market risk:

Market risk is the risk that changes in market prices will affect the Company’s income or the value of

the financial instruments. Market risk is comprised of three types of risk: commodity price risk, interest

rate risk, and currency risk.

Commodity price risk:

The Company’s cash flow sensitivity to commodity price changes is based on the assumption that

the crude oil prices changes 10%, resulting in a change of $8.57/bbl, and a cash flow change of

$208,167 in the same direction (increase or decrease) of the price change.

In February 2013, the Company entered into a financial transaction from May 1, 2013 to

December 31, 2013 to fix the price of 100 bbl/d of oil at $90.02/bbl CDN at Edmonton.

Interest rate risk:

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market

interest rates, and relates primarily to the Company’s outstanding line of credit. As at March 31,

2013, the Company did not carry a balance on its line of credit, so the interest rate risk is $nil.

Currency risk:

The Company has no financial instruments denominated in a foreign currency, and no contracts

in place to reduce the foreign exchange risk.

14. Commitments:

The Company is carrying a lease on its office space, and another lease on the space of FGDT:

Total at March 31, 2013

$

2013 2014-2018 2019-2022

129,351 760,461 494,711

Total 1,384,523

15. Events after reporting period:

Share issues (Note 8)

On April 5, 2013, the Company called another draw on its line of equity of approximately 11,428,571

shares for proceeds of approximately $8 million.

Financial hedge (Note 13)

Subsequent to the year end, the Company entered into a financial transaction from May 1, 2013 to

December 31, 2013 to fix the price of 100 bbl/d of oil at $90.02/bbl at Edmonton.


-29-

Lawsuit

The Company filed a statement of claim for $730,000 with the Court of Queen’s Bench of Alberta on

behalf of its predecessor companies regarding the improper diversion of funds against a former

trustee. There can be no assurance of a favorable judgment at this time.

Property disposition

The Company sold its working interest in two wells in Manitoba in April, 2013. Proceeds of the

disposition were $1.9 million.

Property acquisition

The Company purchased an interest in land and several wells in Manitoba in May, 2013 for

approximately $3.3 million.

Corval Energy Ltd. General Information

- 30 -

Directors Jody Forsyth

(2)(3) - Chairman

Larry Evans (1)(2)

Brian Frank

(1)(3)

Ron McIntosh (2)(3)

Thomas Stan (1) Audit committee (2) Reserves, health, safety and environment committee (3) Corporate governance and compensation committee

Officers Thomas Stan President, and Chief Executive Officer James Screaton ,CA Vice President, Finance and Chief Financial Officer Lavern Rankin Vice-President, Engineering and Operations Dale Timmons Vice-President, Exploration Richard Press Vice-President, Land and Business Development Shannon Gangl Burnet, Duckworth, and Palmer LLP Corporate secretary

Head Office Suite 2400, 500 – 4

th Avenue SW

Calgary, Alberta, Canada T2P 2V6 Telephone: 403-252-7671 Website: www.corvalenergyltd.com

Solicitor Burnet, Duckworth, and Palmer LLP 2400, 525 – 8

th Avenue SW

Calgary, Alberta, Canada T2P 1G1

Bankers National Bank of Canada 311 – 6 Avenue SW Calgary, Alberta, Canada T2P 3H2

Auditor Ernst & Young Canada LLP 1000, 440 – 2

nd Street SW

Calgary, Alberta, Canada T2P 5E9

Reserve Engineers Sproule Associates Limited 900, 140 – 4th Avenue SW Calgary, Alberta, Canada T2P 3N3

Corval quarterly report march 2013 final

Documents

Transcript of Corval quarterly report march 2013 final