Document Sample
mda Powered By Docstoc
					                      ALGONQUIN OIL & GAS LIMITED
                                       P. O. Box 367
                                  Chatham, Ontario, Canada
                                         N7M 5K5

                   For the three months ended September 30, 2010

                                    Corporate Advisories
The following management’s discussion and analysis (“MD&A”) was prepared as of
November 23, 2010. This document is intended to be read in conjunction with the
accompanying audited consolidated financial statements for the year ended June 30, 2010.

Certain statements in the MD&A, other than statements of historical fact, may include
forward-looking information that involves various risks and uncertainties. These can include,
without limitation, statements based on current expectations involving a number of risks and
uncertainties relating to all aspects of the Company’s business and the global economy.
These risks and uncertainties include, but are not restricted to, future oil and gas prices,
performance of the wells in which the Company holds interests, especially the GEL # 18
horizontal well and the potential changes in currency exchange rates. The words “expect”,
“anticipate”, “estimate”, “may”, “will”, “should”, “intend”, and “believe” are intended to identify
these forward looking statements. Forward-looking statements are based on the estimates
and opinions of Management on the dates they are made and are expressly qualified in the
entirety by this notice. The Company assumes no obligation to update forward-looking
statements should circumstances or Management’s opinions change.

This MD&A may contain the terms "funds flow from operations" and "netbacks", which are
not recognized measures under Canadian generally accepted accounting principles
(GAAP). Readers are cautioned that Algonquin's definition of these terms may not be
comparable to that reported by other companies. These measures should not be considered
an alternative to, or more meaningful than net earnings or cash flow from operations. Funds
flow from operations is commonly used in the oil and gas industry to demonstrate the ability
of the business to generate the cash flow necessary to fund future growth through capital
investment and to repay debt. It represents cash flow from operations before changes in
non-cash working capital. Netback is equal to total revenue less royalties, operating costs
and transportation usually expressed on a boe basis. The statistics generated from the
calculation of netbacks is used to analyze operating performance and leverage

                                               Three Months Ended Sep 30   Twelve Months ended Jun 30
                                                    2010          2009        2010             2009
  Cash Flow from Operations                         12,509       136,063    525,686          108,191
  Change in non-cash working capital              (93,310)        42,222    169,761        (242,051)
  Funds Flow from operations                      105,819         93.841    355,925          350,242

Working capital, which is defined as current assets less current liabilities, and net debt,
which is defined as the sum of working capital and long-term bank debt, is used in the
industry to assess efficiency and financial strength. There is no GAAP measure that is
reasonably comparable to working capital and net debt.


The company currently produces no natural gas. However, Algonquin Oil & Gas will follow
industry practice of calculating barrels of oil equivalent ("boe") based upon a conversion rate
of six thousand cubic feet ("mcf") of natural gas to one barrel ("bbl") of crude oil. Disclosure
using barrels of oil equivalent ("boe") may be misleading, particularly if used in isolation. The
basis for the boe conversion ratio of 6 mcf equals one bbl is an energy equivalency
conversion method, primarily applicable at the burner tip. This conversion rate does not
represent a value equivalency at the wellhead.


The Company’s accounting and financial reporting staff comprises one bookkeeper who
works with the assistance of a consulting chartered accountant under the supervision of the
Chief Executive Officer. All cheques must be signed by two officers or directors of the

The financial statements for Algonquin Oil & Gas Limited have been prepared by
management in accordance with Canadian generally accepted accounting principles
consistently applied. The Company is responsible for the integrity and objectivity of the
consolidated financial statements and Management is satisfied that these consolidated
financial statements have been fairly presented.


The Company has carried out an evaluation under the supervision and with the participation
of the Management of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures. Based upon its evaluation, the Company has concluded
that, as at September 30, 2010, the disclosure controls and procedures were effective in all
material respects. The term “disclosure controls and procedures” is defined under
Multilateral Instrument MI52-109 as controls and other procedures of a public company that
are designed to ensure both non-financial and financial information required to be disclosed
by the company in its periodic reports is recorded, processed, summarized and reported in a
timely fashion.


Algonquin Oil & Gas Limited is a reporting issuer in Ontario, British Columbia,
Saskatchewan, and Alberta, and trades on the TSX Venture Exchange under the symbol
AQX. Total common shares issued and outstanding at November 23, 2010 were 9,869,190.

CUSIP : 015855109

ISIN : CA 0158551097


The Company was reoriented in 1997 to explore for oil and natural gas in southwest
Ontario. Certain offshore leases were acquired from SEC Exploration by trading for property
the company owned in Alberta. In the spring of 2000 Algonquin completed the acquisition of
Gaiswinkler Enterprises Ltd. (GEL) thus consolidating its interests in the area. Today, its
primary holdings of oil and gas rights, both producing and undeveloped, are the onshore
and offshore leases in Lake Erie at Colchester, Ontario. These leases are held by
production. All leases not held by production were relinquished to the Crown on December
31, 2008. The Corporation intends to reevaluate these expired exploration leases and
determine an appropriate course of action in the normal course of business. Oil and gas
resources at Colchester, beneath Lake Erie, may be accessed only by horizontal wells
drilled from surface locations onshore. There are opportunities to drill short reach horizontal
wells of 1700 meters from near shore locations at Colchester. The Company has drilled and
is producing crude oil from one multi-leg horizontal well under Lake Erie known as GEL #18
(Colchester S Unit 81-1). Algonquin has shot a large amount of two-dimensional marine
seismic data over its holdings in both Lake Erie and former leases held in Lake St. Clair.
Geophysical interpretation has provided the company with certain leads that may result in
exploration efforts in the future. The Company operates 100% of its production and
maintains a water separation unit and storage battery at Colchester. Crude oil is trucked to
the Imperial Oil refinery at Sarnia, Ontario. Algonquin does not currently produce economic
quantities of natural gas. Any future production of gas would be sold to Union Gas (a
Spectra Energy Company) of Chatham, Ontario.


Crude Oil Production bbls.                  Three Months Ended Sep 30    Twelve Months Ended June 30
                                                  2010          2009          2010           2009
 GEL #18                                          1,912          2,653         9,207           5,902

 Colchester #8                                      261            279           811             629
 Colchester #11                                      21             28           143             109
 Colchester #16                                     305            151           772             551
                                                    587            458         1,726           1,289

 Total Operated Production                        2,499          3,111        10,933           7,191

The company is heavily reliant on its single multi-leg horizontal well, GEL#18, put into
production on November 11, 1997. Total production from GEL#18 for the first quarter came
to 1,912 bbls. or 21 bbls. per day compared to 2,653 bbls. or 29 bbls. per day in the same
period a year ago. This represents a decrease of 741 bbls or 28% from this one well in the
first quarter due to a complete shutdown of the field for ten days for required installation
changes ordered by the Ministry of Natural Resources.

Colchester #8, #11 and #16 are low productivity vertical wells drilled by Imperial Oil in 1959.
The combined production from the three Colchester wells in the first quarter was 587 bbls.
or 6 bbls. per day as compared to 458 bbls. or 5 bbls. per day in the same period a year
earlier. The increase of 129 bbls. or 28% is attributable to higher production at COL #16.
This is considered to be optimum productivity for this well in a quarterly reporting period.

The decrease in our overall corporate production during the first quarter is primarily the
result of shutdown for required installation changes ordered by the Ministry of Natural

In the three month period ended September 30, 2010 the average selling price received for
crude oil was CAN$79/bbl which was $4 or 5% higher than the CAN$75/bbl received during
the first quarter of 2009.


During the first quarter, consolidated revenue after adjustment for royalties was $220,240
which is down from $235,311 from last year. The revenue decrease in the current quarter
was $15,071 or 6% attributable to lower volumes but slightly higher crude oil commodity

An overriding royalty on non-operated production at Wheatley, Ontario provided $44,800 of
our reported revenue during the first quarter as compared to $46,159 last year for a
decrease of $1,359 or 3% due to lower volumes but slightly higher crude oil commodity
pricing. An overriding royalty on production from the 4-2-115-6W6 well in the Zama area of
northwest Alberta for the first quarter was $2,491 as compared to $2,884 in the same
quarter last year.

Algonquin’s operating expenses this first quarter were $60,475 for a decrease of $4,796 or
7% as compared to $65,271 in the same period last year. The company completed
maintenace and upgrade of existing surface facilities in the previous year.

Office and general expenses for the first quarter were $34,133 compared to $41,104 the
previous year for a decrease of $6,971 or 17%. This is attributable to management fees
which were paid in the previous year but are no longer being paid.

Depreciation, depletion and amortization costs for the first quarter were $38,870 compared
to $46,590 the previouse year for a decrease of $7,720 or 17% due to a decrease in

On the non-operating side the company has experienced an increase in the first quarter of
$3,194 or 52% in interest charges specifically related to the floating rate J.D. Fair debenture.
.This increase is due to interest being charged on the unpaid interest owing on the
debenture. In 2009 and prior years this additional interest amount was forgiven by Mr. Fair.
Currency exchange rates are a significant factor as the debenture is denominated in U.S.
funds. TIn the first quarter the company recorded a foreign exchange rate gain of $15,604
related to our US$350,000 exposure to the J.D. Fair debenture and the accrued interest.


Quarterly Data (Unaudited)

                                      FYE June 30, 2010

                                          1st         2nd         3rd           4th
                                          Quarter     Quarter     Quarter       Quarter
  Revenue (net of royalties)                220,240
   Net Income (Loss)                        75,554
   Cash Flow (Deficit) from Operations      12,509
   Earnings (loss) per Share                 0.008

                                          1st         2nd         3rd           4th
                                          Quarter     Quarter     Quarter       Quarter
  Colchester, Ontario
   Average Net Oil (bbl/d)                   29.45
   Average Sales Price ($/bbl)              $79.17
   Average Royalties ($/bbl)                $12.21
   Average Production Costs ($/bbl)         $18.47
   Average Netback ($/bbl)                  $48.49

                                      FYE June 30, 2010

                                          1st         2nd         3rd           4th
                                          Quarter     Quarter     Quarter       Quarter
  Revenue (net of royalties)                235,311    149,267        254,445     242,746
   Net Income (Loss)                        91,727     (31,304)      63,188     (198,007)
   Cash Flow (Deficit) from Operations     136,063       23,643      38,881       327,099
   Earnings (loss) per Share                 0.009      (0.003)        0.006      (0.020)

                                          1st         2nd         3rd           4th
                                          Quarter     Quarter     Quarter       Quarter
  Colchester, Ontario
   Average Daily Production (bbl/d)          33.81        17.90       34.25        33.50
   Average Sales Price ($/bbl)              $75.39      $67.49       $83.56       $79.41
   Average Royalties ($/bbl)                $11.27      $11.89       $12.76       $12.12
   Average Production Costs ($/bbl)         $18.77      $56.05       $26.44       $15.04
   Average Netback ($/bbl)                  $45.35      ($0.45)      $44.36       $52.25

Management does not believe that there is significant seasonality to the company’s

Capital Expenditures

There were major capital expenditures of $120,672 during the first quarter ending
September 30, 2010 for the completion of a new well (Algonquin # 23) at the southern end
of our battery lease at Colchester. Work began in March, 2010. A number of problems were
encountered during the drilling that have resulted in the costs increasing far beyond those
anticipated to be incurred. Management reviewed the costs incurred to year end June 30,
2010 and determined that, as a result of the problems that were experienced, this well’s
value was impaired and, as a result, made a provision in the June 30, 2010 financial
statements in the amount of $294,357.           The well failed to encounter significant
hydrocarbons but is being evaluated as a brine disposal well.

Liquidity and Capital Resources

As of September 30, 2010, the corporation had a working capital deficit of ($717,690) versus
($712,641) at June 30, 2010. The company remains burdened with excessive debts and
accounts payable, the majority of which are internal obligations. The primary component of
the working capital deficit is the J.D. Fair debenture in the amount of US$350,000
(CAN$368,900 using 1.054 CAN$ / US$) with an interest rate set at U.S. Prime plus 3%.
The debenture had a term extending to May 31, 2010 at which time it was extended to 30
days after the Holder gives written notice of termination. Also included in the working capital
deficit is total accrued interest of $219,740 relating to this loan.

Restoration and abandonment obligations are secured by two letters of credit issued by
Scotia Bank in Chatham, Ontario in favor of the Ministry of Natural Resources. These
instruments are for a total of $58,000 and mature on October 31, 2011 and February 1,
2011. As security for these letters of credit, the Company has set aside $58,000 in cash at
Scotia Bank, Chatham, Ontario. In addition the Company has set aside $12,000 as cash
security for two credit cards held by the Company.

The corporation continues to demonstrate several consecutive quarters of improved
operations and has again been cash flow positive on an operating basis in the past year.
The company is nearing completion of a new brine disposal well (Algonquin # 23). Due to
unanticipated problems, cost of the project has exceeded the budget, but we anticipate cash
flows will be sufficient to settle all invoices related to this work. The ability to discharge
liabilities in the normal course of business is dependent upon future profitable operations
and/or obtaining additional debt or equity financing. There are currently several initiatives
the company is pursuing to materially improve the working capital position.


The related party transactions are set out in Note 10 of the audited consolidated financial
statements at September 30, 2010. All numbers presented are for the three month period.

The Company paid consulting fees of $20,507 (2009 - $19,839) to companies owned by
Leo F. Gaiswinkler, the President of GEL Exploration Limited. The Company has an
agreement to pay Mr. Gaiswinkler $5,000 per month plus expenses for consulting fees. This
agreement expires March 31, 2011.

The Company paid management fees of $Nil (2009 - $7,800) to Gregory T. Stewart, the
former Chairman and CEO/President of the Company.

Interest incurred on the debenture payable and advances from James D. Fair, the Chairman
of the Company was $9,378 (2009 - $6,184). The Company paid interest to a company
owned by Leo F. Gaiswinkler, President of GEL Exploration Limited in the amount of $425
(2009 – nil) and $976 (2009 - $Nil) to Leo F. Gaiswinkler.

An overriding royalty in the amount of $5,923 (2009 - $6,380) was paid to Leo F.
Gaiswinkler, the President of GEL Exploration Limited.

During the year ending June 30, 2010, the Company acquired an interest in five wells
located in Joarcam Area of Alberta for $10,000. After further evaluation of these properties
and an assessment of the additional costs that would have been required to maintain its
future interests, it was agreed by the Board of Directors that the Company was not willing to
continue to participate in these wells. As a result, it sold all of its interests in these wells for
$2,000 to a company owned by two directors, Gregory Stewart and Russell Stewart. This
value was an estimate of the net realizable value of the interests in these wells after the
additional costs and performance to date were examined.

Included in accounts payable and accrued liabilities is $230,001 (2009 - $335,898) owing to
officers and directors of the corporation.

These transactions are measured at the exchange amount which is the amount of
consideration established and agreed to by the related parties. In addition see note 5 of the
financial statements.


The Company is required to remove production equipment, batteries, pipelines, and restore
land at the end of oil and gas operations. The Company estimates these costs in
accordance with existing laws, contracts and other policies. These obligations are initially
measured at fair value, which is the discounted future value of the liability. These costs are
also capitalized as part of the cost of the related assets and amortized over the useful life of
the assets. An annual increase to the liability will be recorded to recognize the passage of
time and the impending settlement of the obligation. The liability will be impacted by any
changes in the assumptions used in the asset retirement obligation calculation. Adjustments
to the estimate will be recorded as an increase or decrease to the related assets on the
consolidated statements of operations. The asset retirement obligation cost calculations

were derived from typical industry experience and practices. The deemed asset retirement
obligation liability for wells and facilities is the sum of the calculated abandonment and
reclamation liabilities adjusted for designated status as active, inactive, abandoned, or
problem site. Estimating future asset removal costs is difficult and requires management to
make estimates and judgments because most of the removal obligations are many years in
the future and contracts and regulations often have vague descriptions of what constitutes
removal. Asset removal technologies and costs are constantly changing, as well as
regulatory, political, environmental, safety and public relations considerations. As a result, it
is not possible to provide a reliable analysis of the impact that changes in removal costs
would have on the asset retirement obligation.


Algonquin’s operations are subject to risks normally associated with the oil and gas industry.
Oil and natural gas exploration and production involves many risks, including water entering
a producing formation, decline of reserves, blow-outs and fires. The Company conducts its
activities in accordance with industry practice. Some risks are not covered by insurance and
could have an unfavourable effect upon the Company’s finances. There is no guarantee that
oil or natural gas will be discovered. Financial risks include commodity prices and production
facility costs. The Company’s accounts receivable are with customers in the oil and gas
industry and are subject to normal industry credit risks. The Company is exposed to financial
risk that arises from the credit quality of the entities to which it provides its natural gas, crude
oil and other by-products. Credit risk arises from the possibility that the entities to which the
Company provides these commodities may experience financial difficulty and be unable to
fulfill their obligations. The Company’s revenues are dependent on a selective customer
base. The marketability of crude oil acquired or discovered will be affected by numerous
factors beyond the control of the company. These factors include reservoir characteristics,
market fluctuations, the proximity of refineries and processing equipment and government
regulation. Operations are affected in varying degrees by government regulation such as tax
increases, expropriation of property, environmental and pollution controls or changes in
conditions under which the oil and gas may be marketed. The Company’s operations are
subject to compliance with federal, provincial and local laws and regulations controlling the
discharge of materials into the environment or otherwise relating to the protection of the
environment. Although satisfactory title reviews are conducted in accordance with industry
standards, such reviews do not guarantee or certify that a defect in the chain of title may not
arise to defeat the claims of the Company to certain properties. In addition, the success of
the Company will be largely dependent upon the performance of its key officers and
employees and consultants.

The Company is unusually dependent on one well: The GEL #18 (Colchester S Unit 81-1) a
horizontal well extending under Lake Erie. Although this well has demonstrated an improved
level of production, it is a complex well with a high water cut and could decline or become
uneconomic unexpectedly at any time. In addition, the Company’s financial situation makes
it dependent on the forbearance of certain creditors. These creditors are directors of the
Corporation and have not exercised certain of their legal rights against the company in the
past, but one or more might do so at any time, causing financial difficulties.


There are no unusual events or transactions.


The Accounting Standards Board (AcSB) has announced that publicly accountable
enterprises must adopt International Financial Reporting Standards (IFRS) for fiscal years
beginning on or after January 1, 2011. The Company will report in IFRS effective for the
fiscal year ended June 30, 2012 with appropriate comparative IFRS financial information to
be presented for the fiscal year ended June 30, 2011.

The following areas are being assessed by the Company in its conversion plan.

       Accounting policy selection and analysis
       Information technology changes
       Internal control over financial reporting
       Disclosure controls and procedures
       Financial reporting expertise
       Impact on business activities

Accounting policy analysis and selection of accounting policies

After discussions between management and its advisors, management has determined the
following areas may require changes to current accounting policies.

       Exploration and development expenditures
       First time adoption of IFRS
       Impairment test of long loved assets
       Intangible assets
       Provisions and asset retirement obligations
       Stock based compensation

The Company is in the process of examining accounting policies and determining the
potential implications for the above noted areas.

Information Technology Changes

The Company does not anticipate any changes will be required ot its Information
Technology systems as a result of converting to IFRS.

Internal control over financial reporting

Until final accounting policy choices have been agreed upon, the changes to this area
cannot be determined at the present time.

Disclosure controls and procedures

Interim filings during fiscal 2011 will provide updates to the conversion plan.

Financial reporting expertise

Management is discussing its conversion plan with the Company’s auditors who are
providing the necessary expertise in this area. The Company expects to also rely on
assistance from its outside accounting firm.

Impact on business activities

The Company does not anticipate that the conversion to IFRS will have any impact on the
business activities of the Company.


Additional information relating to the Company can be found on SEDAR at
Algonquin Oil & Gas Limited does not currently maintain a web site.


James D. Fair
Tel (313) 823-9737


Board of Directors                    Officers

James D. Fair                         James D. Fair
Chairman of the Board                 President and Chief Executive Officer
St. Clair Shores, Michigan USA

Leo F. Gaiswinkler
Realoil Enterprises Limited           Leo F. Gaiswinkler
Chatham, Ontario                      Ontario Operations Manager
                                      Chatham, Ontario
George M. Leitch, P.Eng. 1,2
Leitch Engineering                    Kandy L. Osborne
Calgary, Alberta                      Corporate Secretary
Gregory T. Stewart 1,2
Calgary, Ablerta

Russell J. Stewart 1,2
TD Meloche Monnex                     Independent Qualified
Edmonton, Alberta                     Reserves Evaluators
                                      Jim McIntosh Petroleum Engineering Ltd.
                                      London, Ontario
Audit Committee 1
                                      Legal Counsel
Gregory T. Stewart - Chairman         Macleod Dixon LLP
George M. Leitch                      Calgary, Alberta
Russell J. Stewart
Reserves Committee 2                  NPT LLP
                                      London, Ontario
George M. Leitch - Chairman
Gregory T. Stewart                    Bankers
Russell J. Stewart                    ScotiaBank
                                      Chatham, Ontario
Corporate Offices
P.O. Box 367                          Transfer Agent
Chatham, Ontario                      Equity Financial Trust Company
N7M 5K5                               Toronto, Ontario
Tel. (519) 354.4755                   (416) 361-0152
Fax. (519) 354.1730

Exchange Listing
AQX - Venture
Shares O/S 9,869,190