corval quarterly report - september 2013

Corval Energy Ltd.

QUARTERLY REPORT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013

Corval Energy Ltd. President’s Message

For the nine months ended September 30, 2013

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PRESIDENT’S MESSAGE

Fellow Shareholders, I am pleased to present the Financial Statements and MD&A for the nine months ended September 30, 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 main theme in the third quarter was the unusually wet weather conditions in Manitoba in July to mid-August that resulted in Corval curtailing its drilling program until drier conditions prevailed. This was not an easy decision to make for an emerging company, however we believe it was the correct decision in order to ensure that the wells were drilled within budget as we did not incur extra costs dragging equipment through very muddy conditions. Once the ground dried up, Corval continued its capital program. Six wells in total were drilled between late June and the end of September. Corval completed and brought on-stream five of these wells in September. Although the production increases from these successful wells had only a minor impact on the third quarter results, the impact has become apparent in the fourth quarter, as Corval’s production has climbed to over 800 barrels of oil per day (bopd), with two wells awaiting completion in late November. The third quarter of 2013 saw a slight decrease in production from the second quarter as natural declines were only partially offset by additional production brought on late in the quarter. For the quarter Corval averaged 457 bopd with associated cash flow of $2.0 million. Crude oil prices remained strong in the quarter, averaging over $100 per barrel. In addition, once the ground dried up, we completed the installation of an oil treater and associated water disposal line at the Sinclair oil battery. The installation of the oil treater and water disposal line are expected to reduce trucking costs for the Company. We are pleased that this work, completed early in October, was done for only $1.2 million and will allow for processing over 2,000 barrels of oil per day, allowing significant room for growth. Although our drilling program has been deferred, we are still planning to drill up to 17 wells and exit at a target rate of 900 to 1,000 barrels of oil per day. The Company has drilled, with a partner, three gross wells (0.75 net wells) that are currently being completed, and are moving to drill two additional operated wells, weather and government approvals permitting. In addition, we have added approximately twenty sections of land to our inventory, as we look at expanding our play in the surrounding area. We plan to drill an exploratory well in the near future to commence testing our concepts. Corval continues to be in a strong financial position, with funds currently available from our equity line, unutilized bank line, and cash flow. This will enable us to implement our 2013 and beyond capital program, as well as allowing sufficient financial flexibility to take advantage of additional opportunities that may arise in our focus area. As many of you may remember, Corval commenced operations only a year ago, on October 17, 2013. As we look back on our first year of operations, we are extremely pleased with the progress that has been made. We have accomplished what we set out to do in the first year, in terms of production growth, completing a capital program within budget, and maintaining financial flexibility. We continue to look forward to the future to continue to meet targets and provide value to our shareholders.

http://www.corvalenergyltd.com/

mailto:[email protected]

Corval Energy Ltd. President’s Message


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Sincerely,

Tom Stan President & CEO CORVAL ENERGY LTD.

Corval Energy Ltd. Financial and Operations Overview


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Financial and Operations Overview

Financial ($000s except per share amounts)

Three months

ended

September 30, 2013

($000s)

Nine months

ended

September 30, 2013

($000s)

Petroleum and natural gas sales 4,317 11,243

Funds from operations* (before changes in non-cash working capital) 1,959 5,090

Basic ($/share) 0.03 0.10

Net income (loss) 137 (794)

Basic ($/share) 0.00 (0.02)

Working capital (excluding non-cash commodity price contract asset) $2,495 $2,495

Capital expenditures

Land and seismic 51 332

Drill and complete 6,642 14,483

Equipment, facilities and other 1,817 3,744

Development capital 8,510 18,559

Exploration and evaluation 21 1,560

Property acquisitions - 3,306

Property dispositions - (1,897)

8,531 21,528

Operating

Average production (bbl/d) 457 441

Average realized price ($/bbl) 102.40 93.39

Netback ($/bbl)

Petroleum and natural gas sales 102.40 93.39

Realized loss on commodity price contract (4.58) (1.79)

Royalties (15.78) (14.05)

Operating expenses (16.92) (16.88)

Netback before workovers 65.12 60.67

Workovers (7.31) (3.64)

Operating netbacks* 57.81 57.03

Total wells drilled 5 11

Working interest wells 5 11

Land holdings (acres) 31,459 23,290

Common shares o/s at period-end (000’s) 70,391 70,391 *Note: Funds from operations and operating netbacks do not have a standardized meaning under GAAP. Refer to non-GAAP

measures in this report.

Corval Energy Ltd. Management Discussion and Analysis


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November 29, 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 completed 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.

HIGHLIGHTS

Corval started the third quarter by commencing its second phase drilling program. Three wells were drilled by

early July, and then heavy rains caused Corval to defer its drilling program. A total of six wells were drilled

from late June until the end of the third quarter. Five of these wells were completed in the quarter, and were

brought on-stream, starting in late August.

Production averaged 441 bopd for the nine months ended September 30, 2013, while cash flow was $5.1

million for the same period. Production averaged 457 bopd in the third quarter of 2013, a decrease of 17%

from the second quarter due to the natural declines from wells, prior to the new wells being brought on-

stream.

Crude oil prices in the first nine months of 2013 averaged $93.39/bbl.

Operating netbacks for the nine months were $57.03/bbl.

In order to manage exposure to fluctuating crude oil pricing, Corval fixed an additional 100 bopd at $101.35,

WTI in Canadian dollars from August 1, 2013 to July 31, 2014.

Increased bank facility in in the fourth quarter from $13.5 million to $15.0 million.

The drilling program increased production to over 800 bopd in mid-November, with two wells still to be

completed and two new partner-operated wells to be brought onstream.

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 and nine months ended September 30, 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 = 1 bbl) 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.



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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, the effects of inclement weather and natural disasters, 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.

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

expenditure budget, drilling and completion plans, anticipated production levels, projected land acquisitions, future

debt levels, operating and transportation costs, and other financial results, source of funding of the Company’s

capital program, future plans to draw down on Corval’s equity line, tax pools, future production, and decline rates.

OVERVIEW OF PERFORMANCE AND DISCUSSION OF OUTLOOK

Overview

Production for the nine months ended September 30, 2013 averaged 441 bopd. The third quarter of 2013 saw a

slight decrease in production resulting from the natural decline of production from first quarter drilling program, and

a delayed start to the second and third quarter drilling program due to poor weather conditions. For the quarter, the

Company averaged 457 barrels of oil per day with associated cash flow of $2.0 million.

Crude oil pricing continues to be strong in the nine months of 2013, averaging $93.39/bbl in the field, before

recognizing losses from the hedging program. Crude oil prices have decreased after the quarter end, however prices

(WTI in $US) remain over $90.00/bbl. The Company continues to receive solid netbacks due to its high quality

crude pricing and low operating costs. The Company undertook some needed workovers, resulting in higher

operating costs of $24.23/bbl for the quarter, and lower field netbacks averaging $57.81/bbl for the three months

ended September 30, 2013, as compared to the second quarter average operating costs of $16.46/bbl and field

netbacks of $60.00/bbl.

In the quarter, Corval entered into a commodity price contract of 100 bopd at $101.35/bbl WTI converted to CDN$

from August 1, 2013 to July 31, 2014. This contract is in addition to the 100 bopd fixed at $90.02/bbl at Edmonton

from May to December, 2013 that was entered into during the second quarter.

Corval spent $8.5 million on capital expenditures in the quarter, including costs to drill five wells, and complete and

tie-in five wells, leaving the two remaining wells to be tied in during the fourth quarter. These wells were brought

on-stream late in September, resulting in September production averaging 542 bopd. Production for early

November has increased to over 800 bopd, based on field estimates, as the five new wells have produced for a

complete month.



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During the nine months ended September 30, 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. In April, Corval

called $8.0 million on its line of equity, and in September, the remaining $9.0 million of the line of equity financing

was called to fund the ongoing capital program.

In the fourth quarter, Corval reviewed its credit facilities with the lender, and increased its available line of credit

from $13.5 million to $15.0 million. Currently the credit line is undrawn.

Corporate

Grey Market Trading

Corval’s common shares are not listed, traded or quoted on any stock exchange. Registered dealers may facilitate

trades of the Company's common shares to eligible purchasers through the grey market. Since grey market securities

are not traded or quoted on an exchange or interdealer quotation system, investor's bids and offers are not collected

in a central spot so market transparency is diminished and best execution of orders is difficult. The sale of the

Company's common shares through the grey market is at the shareholder's own risk and the Company does not

endorse such trades.

The Company understands that Acumen Capital Partners Limited and AltaCorp Capital, both registered dealers,

have previously organized trades in Corval’s common shares on the grey market. Please contact these dealers with

inquiries regarding trading your common shares on the grey market.

If you are interested in selling your Corval shares, to find a contact, you may either:

i) Look on our website at www.corvalenergyltd.com;

ii) E-mail us at [email protected].

Results of Operations – Third 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 457 bopd and 441 bopd for the three and nine months ended September 30, 2013.

The production for the third quarter of 2013 is a decrease of 90 bopd from the second quarter production or 16%.

The decline in production resulted from the natural decline of production from first quarter drilling program, and a

delayed start to the second and third quarter drilling program due to wet weather conditions in Manitoba.

Revenues, comprised entirely of oil sales, were $4,316,805, representing an average price of $102.40 per bbl for the

three-month period, and $11,242,891, representing an average price of $93.39 per bbl, for the nine-month period,

both prices prior to the impact of the hedging program. The revenues for the three-month period ending September

30, 2013 were $157,990 lower than the three-month period ending June 30, 2013, a 4% decrease. The average price

for the third quarter of 2013 was $12.27 (14%) per bbl higher than the average price for the second quarter of 2013.

For the three months ended September 30, 2013, the Company recorded a net income of $137,107, and for the nine

months, a net loss of $793,894. The Company incurred capital expenditures of $8,530,918 during the three-month

period, primarily related to the third quarter drilling program, consisting of drilling, completing, equipping, and

tying-in five wells in the Sinclair area of Manitoba. As a result, the total capital expenditures were $20,119,234 for

the nine-month period before acquisitions and divestitures.


mailto:[email protected]



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Funds from operations for three and nine months ended September 30, 2013 were $1,959,236 and $5,090,157

respectively. The funds from operations for the third quarter of 2013 represents a decrease of $299,762, or 13%,

from the second quarter of 2013 resulting from both a decrease in production as wells from the first quarter drilling

program declined, and a delay in the second and third quarter drilling program due to poor weather conditions.

OUTLOOK

Capital Expenditure Program - 2013

In May, 2013, the Board approved the full year capital program of $30.7 million, which includes drilling a total of

17 gross wells. Corval continued with its capital program in late June after break-up, drilling three wells prior to the

very rainy and wet conditions in southwest Manitoba, which delayed the capital program until mid-August. To the

end of September, Corval drilled a total of 11 wells in 2013: five wells from the winter program, and six wells

during the second and third quarter. Late in the third quarter, five wells were completed and tied in, with another

two wells scheduled to be completed in November, 2013. Production has increased to over 800 bopd in November,

and the well performance to date is consistent with the originally projected type curves. The drilling program

includes up to an additional five wells to be drilled in the remainder of the year, weather and regulatory approvals

permitting. In addition, the Company plans to continue its program of acquiring additional land in the region, to add

additional drilling locations.

Corval is moving forward as planned, with well costs and well performance on target. With production currently

in excess of 800 bopd, and the continuation of strong crude oil prices, cash flows are expected to remain strong.

Corval is in a unique position for a junior/emerging oil company as it continues to be :

i) well-financed with cash and a $15.0 million unutilized line of credit,

ii) generating cash flows in excess of $12 million per year based on current production, of light oil which generates

netbacks that are currently over $55.00 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) continuing 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 remained in excess of $100/bbl through to September of 2013. Increased crude oil production in

Western Canada and the United States has resulted in ongoing pipeline takeaway constraints for crude oil. Currently

Corval has not been impacted, however we continue to monitor the situation. After the quarter end, crude oil prices

(West Texas Intermediate (WTI)-$U.S.) have decreased to the $95.00 per barrel range, and the differential between

WTI and Edmonton Par price has widened from the $7.00 per barrel range to over $15.00 per barrel range. If this

differential remains wide, it would reduce Corval’s cash flow in future months. In September, the Company called

its remaining $9 million line of equity. Corval is, therefore, in a strong financial position to continue its planned

capital expenditures program. The Company will continue to monitor its funds from operations 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 three and nine months ended

September 30, 2013.



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Production

Period ended September 30, 2013 Three

months

Nine

months

Oil, condensate, & ngls – bbls/d

457

441

Production of 457 bbls/d for the third quarter decreased from 547 bbls/d during the second quarter of 2013. New

wells were brought on production in late September, which should result in increased production levels for the

fourth quarter.

Revenue


months

Nine

months

Sales - oil $ 4,316,805 $ 11,242,891

Average price

Oil ($/bbl)

$ 102.40

$ 93.39

The Company’s crude oil production is light, sweet oil with an API of 38 degrees. The realized average price for the

three months ended September 30, 2013 is $12.27 per bbl (14%) higher than the price of $90.13 per bbl for the three

months ended June 30, 2013. The crude oil is priced from Cromer, Manitoba, and traded at a discount to WTI of

slightly less than $CDN $7.00/bbl over the nine month period.

Commodity price contracts / hedging


months

Nine

months

Realized loss on commodity price contract (cash portion)

Unrealized gains on commodity price contract (non-cash portion) $ 192,877

(233,300)

$ 214,989

(58,800)

Total commodity price contract expense $ (40,423) $ 156,189

Per bbl

Cash portion of commodity price contract – loss (gain)

Non-cash portion of commodity price contract – loss (gain)

Total commodity price contract expense – loss (gain)

$ 4.58

($ 5.53)

($ 0.96)

$ 1.79

($ 0.49)

$ 1.30

The Company has two commodity price contracts in place. In March, Corval fixed 100 bopd at $90.02/bbl at

Edmonton from May to December, 2013. In July, 2013, an additional 100 bopd was fixed at $101.35/bbl, WTI in

Canadian dollars from August 1, 2013 to July 31, 2014.

Royalties


months

Nine

months

Crown royalties

Freehold royalties $ 10,194

602,946

$ 15,360

1,520,223



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Overriding royalties 52,124 155,592

Total royalties $ 665,264 $ 1,691,175

Per boe

Percentage of revenue $ 15.78

16.1%

$ 14.05

15.3%

The royalty rate has increased in the third quarters of 2013, mainly due to prior period adjustments as a result of an

audit by a royalty holder. 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 workover costs


months

Nine

months

Operating costs

Expensed workovers $ 713,476

308,158

$ 2,032,166

438,424

Total operating costs $ 1,021,634 $ 2,470,590

Per bbl

Operating costs

Expensed workovers

Total operating costs

$ 16.92

$ 7.31

$ 24.23

$ 16.88

$ 3.64

$ 20.52

Operating costs averaged $24.23 and $20.52 per bbl for the three and nine months ended September, 2013

respectively. Operating costs for the three months ended September 30, 2013 consisted of $16.92 for regular

operating costs and $7.31 per bbl for expensed workovers, as compared to operating costs for the three months

ended June 30, 2013, of $15.34 for regular operating costs and $1.12 for expensed workovers, for a total of $16.46

per bbl. The Company performed 14 workovers in 2013 on wells acquired from the private trust, including

bottomhole pump and packer repairs that were required from the outset at acquisition and were necessary to

maintain production. Maintenance on the water disposal well was also done to prepare it for increased disposal

requirements. Operating costs per bbl have increased during the third quarter due to decreased production in the

quarter, but have decreased overall due to annual production increases.

Operating netbacks


months

Nine

months

Per boe

Revenues

Commodity price contract expense – cash portion

Royalties

Operating costs

$ 102.40

(4.58)

(15.78)

(16.92)

$ 93.39

(1.79)

(14.05)

(16.88)

Operating netback per boe before workovers $ 65.12 $ 60.67

Workovers (7.31) (3.64)

Operating netback per boe $57.81 $57.03

The netback for the three months ended September 30, 2013 of $57.81 is 4% lower than the netback for the three

months ended June 30, 2013 of $60.00, due to the increased operating costs from workovers during the third quarter,

partly offset by the increased oil price. Netbacks for the Manitoba properties are generally higher than industry

average due to strong prices for the light sweet crude produced in the region, combined with reasonable operating

costs. The Company expects that trend to continue.



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General and administrative expenses


months

Nine

months

Human resources costs (salaries and benefits)

Professional fees

Occupancy costs

Office supplies, software, and services

Shareholder reporting

Travel

Miscellaneous general and administrative

Overhead recoveries

$ 431,683

13,944

95,483

87,822

9,886

7,532

285

(168,842)

$ 1,307,219

161,046

319,849

280,347

68,254

31,110

1,468

(393,313)

Total $ 477,793 $ 1,775,980

General and administrative expenses for the three months ended September 30, 2013 are $246,079 (34%) lower than

the three months ended June 30, 2013 due to reduced expenses over the summer months, and increased recoveries

from overhead allocations due to the capital activity during the third quarter of 2013.

Depletion and depreciation


months

Nine

months

Total depreciation, depletion, and impairment

Per boe

$1,503,193

$ 35.63

$4,314,224

$ 35.84

Depletion for the three months ended September 30, 2013 decreased by $315,632 over the three months ended June

30, 2013 primarily due to production decreasing over that same period.

Funds from operations and net income (loss)


months

Nine

months

Funds from operations

$/share - basic

Net income (loss)

$/share - basic

$ 1,959,236

$0.03

$ 137,107

$ 0.00

$ 5,090,157

$0.10

$(793,894)

$(0.02)

Capital Expenditures


months

Nine

months

Land purchases

Geological and geophysical

Drilling and completion

Equipping and facilities

Other

$ 21

72,663

6,641,499

1,816,735

-

$ 1,472,492

419,486

14,483,253

3,716,158

27,845

Total cash expenditures

Less: Exploration and evaluation expenditures $ 8,530,918

(21,249)

$20,119,234

(1,559,573)

Total: Property, Plant, and equipment expenditures $ 8,509,669 $18,559,661



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Capital expenditures were $21,249 and $1,559,573 for exploration and evaluation assets for the three and nine

months ended September 30, 2013, and $8,509,669 and $18,559,661 for developed and producing assets for the

same respective periods. Corval drilled eleven wells during the nine-month period, and completed, equipped, and

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

and equipment expenditures.

Acquisition and divestiture

a) On May 15, 2013, the Company acquired certain assets in Manitoba for cash consideration of $3,306,224. The

consideration paid was determined to be equivalent to fair value.

The purchase price allocation is as follows:

$

Property, plant, and equipment

Decommissioning liability

3,340,865

(34,641)

Net assets 3,306,224

Cash consideration paid

3,306,224

b) In April, 2013, the Company disposed of its working interest in two non-core wells for cash proceeds of

$1,897,027.

SUMMARY OF QUARTERLY FINANCIAL DATA

The following table summarizes quarterly financial results:

Quarter

ended

Sep-13

$

Jun-13

$

Mar-13

$

Dec-12

$

Sep-12

$

Jun-12

$

Mar-12

$

Dec-11

$ Petroleum

and natural

gas sales

4,316,805

4,474,797

2,451,289

1,364,553

-

-

-

-

Funds from (used in)

operations 1,959,236 2,255,231 875,690 (361,877) - - - -

Income (loss) 137,107 (291,593) (639,408) (8,474,535) - - - -

Production

bopd

457

546

318

221

-

-

-

-

Average

price/bbl

$102.40

$90.13

$85.75

$82.39

$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. On April 5, 2013, the Company requested an $8 million draw from the line of equity,

which resulted in $7,510,437 in proceeds net of share issuance costs from the sale of 11,428,571 shares. 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 eleven wells, and completed, equipped, and tied-in nine wells of its 2013 capital program

during the nine-month period, which comprised the majority of the $20,119,234 in property, plant, and equipment



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expenditures. On September 23, 2013, the Company requested the remaining $9 million balance from the line of

equity, which resulted in $8,507,000 in proceeds net of share issuance costs from the sale of 12,928,572 shares. The

Company closed the quarter with a working capital balance of $2,495,315 at September 30, 2013, which includes

the remaining promissory notes of $25,114 owing.

The Company considers its capital structure to include share capital, and working capital, including the bank loan.

September 30, 2013

$

Current assets* 9,851,725

Accounts payable and accrued liabilities (7,331,296)

Promissory notes (25,114)

Net working capital 2,495,315

Maximum value of bank loan

Amount drawn

13,500,000

-

Unutilized bank loan 13,500,000

Net available funds 15,995,315

*Excludes non-cash commodity price contract asset

The Company’s 2013 capital program was presented to the Board of Directors, and a capital program of $30.7

million was approved. To September 30, 2013, total capital of $21.5 million was expended, including a property

acquisition of $3.3 million and a property disposition with proceeds of $1.9 million. In April and September, 2013,

an $8.0 million and a $9.0 million draw on the line of equity, respectively, was received. The Company expects the

current available funds, bank loan, line of equity, and anticipated cash flow will be able to fund its remaining capital

program for 2013.

During the nine months ended September 30, 2013, the Company negotiated a new bank loan with a Canadian

financial institution for $9.0 million, which was increased to $13.5 million in July, 2013, and increased again

subsequent to the quarter to $15.0 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, 2014. No funds have been drawn

from this bank loan to date.

SHARE DATA

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

interim consolidated financial statements as at September 30, 2013, and the consolidated financial statements at

December 31, 2012.

The Company has 70,391,054 shares outstanding as of the date of this MD&A.

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.



-14-

TRANSACTIONS WITH RELATED PARTIES

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

months ended September 30, 2013, the Company recorded $5,923 and $147,640 respectively in general and

administrative expenses related to this law firm. At September 30, 2013, $4,467 remained in accounts payable.

COMMITMENTS

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

July 31, 2013:

Total at

September 30, 2013

$

2013

2014-2018

2019-2022

35,441

760,461

494,711

Total 1,290,613

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.

Prices, Markets and Marketing of Crude Oil and Natural Gas The marketability and price of oil and natural gas that may be acquired or discovered by the Company is and will

continue to be affected by numerous factors beyond its control. The Company's ability to market its crude oil and

natural gas may depend upon its ability to contract capacity on pipelines that deliver products to commercial

markets. The Company may also be affected by deliverability uncertainties related to the proximity of its reserves to

pipelines and processing and storage facilities and operational problems affecting such pipelines and facilities as

well as extensive government regulation relating to price, taxes, royalties, land tenure, allowable production, the

export of oil and natural gas and many other aspects of the oil and natural gas business.

The Company's revenues, profitability and future growth and the carrying value of its oil and gas properties are

substantially dependent on prevailing prices of oil and gas. The Company's ability to borrow and to obtain additional

capital on attractive terms is also substantially dependent upon oil and gas prices. Prices for oil and gas are subject to

large fluctuations in response to relatively minor changes in the supply of and demand for oil and gas, market

uncertainty and a variety of additional factors beyond the control of the Company. These factors include economic

conditions, in the United States and Canada, product “bottlenecks” caused by transportation capacity constraints, the

actions of the OPEC and Russia, governmental regulation, political stability in the Middle East and elsewhere, the

foreign supply of oil and gas, the price of foreign imports and the availability of alternative fuel sources. Any

substantial and extended decline in the price of oil and gas would have an adverse effect on the Company's carrying

value of its proved reserves, borrowing capacity, revenues, profitability and cash flows from operations.

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:



-15-

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 may 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 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 greenhouse gas (“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, Licenses and Approvals

The Company's properties are held in the form of licenses and leases and working interests in licenses and leases. If

the Company or the holder of the license or lease fails to meet the specific requirement of a license or lease, the



-16-

license or lease may terminate or expire. There can be no assurance that any of the obligations required to maintain

each license or lease will be met. The termination or expiration of the Company's licenses or leases or the working

interests relating to a license 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, licenses 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.

Risk management / 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.

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.



-17-

Recent economic risks

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

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

tighten despite low interest rates. Corval is entirely positioned 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 September 30, 2013 in note

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

FINANCIAL INSTRUMENTS

The financial instruments are described in Note 16 in the interim consolidated financial statements as at September

30, 2013, and in Note 17 in the consolidated financial statements at December 31, 2012.

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

except for those accounting policies noted in Note 3 of the consolidated interim financial statements for the three

and nine months ended September 30, 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.


- 18 -

Corval Energy Ltd.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013

These unaudited interim consolidated financial statements of Corval Energy Ltd. for the three and nine months ended September 30, 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.

-19-

CORVAL ENERGY LTD. Interim Consolidated Statements of Financial Position

As at September 30, 2013 and December 31, 2012

Note

September 30, 2013

(unaudited) December 31,

2012

Assets Current assets:

Cash Trade and other receivables Prepaid expenses Commodity price contract

16

15

$ 7,705,067

1,978,303 168,355 58,800

$ 12,050,366

761,679 185,201

-

9,910,525

12,997,246

Exploration and evaluation Property, plant and equipment

5

4,6

1,559,573

39,464,004

- 23,528,131

Total Assets

$ 50,934,102 $ 36,525,377

Liabilities and Shareholders’ Equity

Current Liabilities: Accounts payable and accrued liabilities Bank loan Promissory notes

7 8

$ 7,331,296

- 25,114

$ 2,175,851

7,450,000 -

7,356,410 9,625,851 Promissory note Decommissioning obligations

8 9

- 2,208,199

568,828 1,807,338

Total Liabilities

9,564,609 12,002,017

Shareholders’ Equity

Share capital 10 49,092,396 32,929,358

Contributed surplus 10(d) 1,545,526 68,537

Deficit (9,268,429) (8,474,535)

Shareholders’ Equity 41,369,493 24,523,360

Total liabilities and shareholder’s equity

$ 50,934,102

$ 36,525,377

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

-20-

CORVAL ENERGY LTD. Interim Consolidated Statements of Loss and Comprehensive Loss For the three and nine months ended September 30, 2013 and September 30, 2012

Note

Three months

ended September 30,

2013 (unaudited)

Nine months ended

September 30, 2013

(unaudited)

Three months

ended September 30,

2012 (unaudited)

Nine months ended

September 30, 2012

(unaudited)

Revenues Petroleum sales Royalties

$ 4,316,805 (665,265)

$ 11,242,891 (1,691,175)

$ - -

$ - -

3,651,540 9,551,716 - -

Expenses Operating costs General and administrative Share-based compensation Depletion and depreciation

10(d)

1,021,634

477,793 501,676

1,503,193

2,470,590 1,775,980 1,476,989 4,314,224

- - - -

- - - -

3,504,296 10,037,783 - -

Finance expenses 11 50,560 151,638 - -

Other expenses Unrealized loss (gain) on commodity price contract Realized loss on commodity price contract

15 15

(233,300) 192,877

(58,800) 214,989

- -

- -

(40,423) 156,189 - -

Net income (loss) and comprehensive loss for the period

$ 137,107

$ (793,894)

$ -

$ -


-21-

CORVAL ENERGY LTD. Interim Consolidated Statements of Changes in Equity For the three and nine months ended September 30, 2013 and September 30, 2012

Note

Number of common shares

Share Capital

Contributed surplus Deficit

Total Shareholders’

Equity

Balance at January 1, 2012

10 10

$ 10

$ -

$ -

$ 10

Balance at September 30, 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

10(a)(i),(ii)

10(d)

11,636,571 - -

7,656,037 - -

- 975,313

-

- -

(931,001)

7,656,037 975,313

(931,001)

Balance at June 30, 2013 57,462,482 $ 40,585,395 $ 1,043,850 $ (9,405,536) $ 32,223,709

Private placements Share based expense Net income for the period

10(a)(iii)

10(d) 12,928,572

- -

8,507,001 - -

- 501,676

-

- -

137,107

8,507,001 501,676 137,107

Balance at September 30, 2013 70,391,054 $ 49,092,396 $ 1,545,526 $ (9,268,429) $ 41,369,493


-22-

CORVAL ENERGY LTD. Interim Consolidated Statements of Cash Flows For the three and nine months ended September 30, 2013 and September 30, 2012

Note

Three months ended

September 30, 2013

(unaudited)

Nine months ended

September 30, 2013

(unaudited)

Three months ended

September 30, 2012

(unaudited)

Nine months ended September

30, 2012 (unaudited)

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

15

$ 137,107

50,560

1,503,193 501,676

(233,300)

$ (793,894)

151,638

4,314,224 1,476,989

(58,800)

$ -

-

- - -

$ -

-

- - -

1,959,236 5,090,157 - - Net changes in non-cash working capital items 12 92,589 (505,203) - -

2,051,825 4,584,954 - -

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

4,6 5 4

12

(8,509,669)

(21,249) - -

4,196,140

(18,559,661) (1,559,573) (3,306,224) 1,897,027 4,460,870

- - - - -

- - - - -

(4,334,778) (17,067,561) - -

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

10 8 7

8,507,001 - -

(8,611)

16,163,038 (545,193)

(7,450,000) (30,537)

- - - -

- - - -

8,498,390 8,137,308 - -

Increase (decrease) in cash and cash equivalents during the period

6,215,437

(4,345,299)

-

-

Cash and cash equivalents, beginning of the period

1,489,630

12,050,366

-

-

Cash and cash equivalents, end of the period

$ 7,705,067

$ 7,705,067

$ -

$ -


Corval Energy Ltd. Notes to the Interim Consolidated Financial Statements For the nine months ended September 30, 2013

- 23 -

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, with 1688869 Alberta Ltd. as FGDT’s

inactive trustee.

Corval explores for and produces oil in Western Canada. Corval Energy Ltd. is domiciled in Canada

at Suite 2400, 500 – 4th Avenue SW, Calgary, Alberta T2P 2V6. These interim consolidated financial

statements were authorized for issue by the Board of Directors on November 29, 2013.

2. Basis of preparation:

The interim consolidated 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 and

nine months ended September 30, 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.


-24-

3. Significant accounting policies

The consolidated interim financial statements have been prepared following the same accounting

policies and methods of computation as the annual consolidated financial statements for the year

ended December 31, 2012, except for these additional policies:

i) Derivative financial instruments

The Company has entered into certain commodity price contracts in order to manage the exposure to

market risks from fluctuations in commodity prices. These instruments are not used for trading or

speculative purposes. Although the Company considers all commodity contracts to be economic

hedges, the Company has not designated its financial derivative contracts as effective accounting

hedges, and thus not applied hedge accounting. As a result, all financial derivative contracts are

classified as fair value through profit or loss and are recorded on the statement of financial position at

fair value. Transaction costs are recognized in profit or loss when incurred.

See Note 15 for specific accounting disclosure.

4. Property acquisition

On May 15, 2013, the Company acquired certain assets in Manitoba for cash consideration of

$3,306,224. The acquisition was recorded as a capital expenditure. The consideration paid was

determined to be equivalent to fair value.

The purchase price allocation is as follows:

$

Property, plant, and equipment Decommissioning liability

3,340,865 (34,641)

Net assets 3,306,224

Cash consideration paid

3,306,224

5. Exploration and evaluation assets

Cost

September 30, 2013

$

Opening balance – January 1, 2013 Additions

- 1,559,573

Closing balance 1,559,573


-25-

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 nine months

ended September 30, 2013, $1,559,573 of E&E assets, including $198,238 of capitalized general and

administrative costs, were added consisting predominately of land acquisitions. There were no

indicators of impairment at September 30, 2013. 6. Property, plant, and equipment

Cost

September 30, 2013

$

Opening balance – January 1, 2013 Current period additions Property acquisition (Note 4) Property disposition Changes in decommissioning liability

31,506,505 18,559,661 3,340,865

(1,897,027) 246,598


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

7,978,374 4,314,224


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 $18,559,661 in expenditures, and $246,598 in additional decommissioning

obligations for the nine months ended September 30, 2013, and were incurred through the

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

The Company acquired a small property for $3,340,865 (Note 4) and disposed of a small property for

$1,897,027 during the nine months ended September 30, 2013.

Future development costs of $7,156,047 have been included in the depletable balance for the nine

months ended September 30, 2013. The Company has not recognized any individual components

that are depreciated separately.

During the nine months ended September 30, 2013, the Company capitalized general and

administrative expenses into property, plant, and equipment of $339,081, consisting predominately of

overhead.

There were no indicators of impairment at September 30, 2013.


-26-

The Company has a $50 million debenture with a floating charge over all of the Company’s assets

pledged to the bank covering the loan (Note 7).

7. Bank loan:

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

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.

In July, 2013, the Company increased the revolving operating demand loan to $13.5 million and

cancelled the development demand loan. The interest rate remains at the Bank’s Prime Rate plus

0.75% and the standby fee at 0.25% of the undrawn portion. The $50 million debenture over all of

the assets of the Company also remains in place. The Company is required to comply with a working

capital financial covenant.

Subsequent to the quarter end, the Company increased the revolving operating demand loan from

$13.5 million to $15.0 million as a result of the mid-year review. The terms of the loan remained the

same, and the next review date is June 1, 2014.

As at September 30, 2013, there were no draws on the loan. 8. 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 $1,479 of additional interest

for the nine months ended September 30, 2013, and paid $545,193 of promissory notes and interest

during the three months ended March 31, 2013. The notes mature three years from date of issue,

which would occur from April to August, 2014. The notes are classified as current liabilities, as they

mature in less than one year.

Promissory notes September 30,

2013 $

Opening balance – January 1, 2013 Additional interest accrued

568,828 1,479

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

570,307 (545,193)

Closing balance 25,114


-27-

9. 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

value of the decommissioning obligations to be $2,208,199 as at September 30, 2013 based on an

undiscounted total future liability of $4,768,000 discounted at a credit-adjusted rate of 8%.

Decommissioning Obligations September 30,

2013 $

Opening balance – January 1, 2013 Additions Acquisitions Dispositions Accretion

1,807,338 262,960 34,641

(16,361) 119,621


10. Share capital:

At September 30, 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, 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 $489,563, for net proceeds

of $7,510,437.

(iii) On September 23, 2013, the Company made a final call on its equity line for 12,928,572 shares

at $0.70 per common share for cash proceeds of $9,050,001 with issue costs of $543,000, for

net proceeds of $8,507,001.

b) Common share options:

During the nine months ended September 30, 2013, 550,000 common share options exercisable at

$0.70 per common share option, and 320,000 common share options excercisable at $0.80 per

common share option, both expiring in five years, were issued to employees and a Board member.


-28-

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 4.2 Issued to June 30, 2013 Issued to September 30, 2103 Expired

550,000 320,000 (30,000)

$0.70 $0.80 $0.70

4.3 4.9 4.2

Issued and outstanding – September 30, 2013 6,295,000 $0.70 4.3

c) Performance Warrants:

During the nine months ended September 30, 2013, 210,000 performance warrants exercisable at

$0.70 per common share option, expiring in five years, were issued to a Board member. The

continuity of performance warrants is detailed below:

Performance warrants

Number

Exercise price

Life (in years)

Issued and outstanding – January 1, 2013 6,750,000 $0.70 4.2

Issued 210,000 $0.70 4.3

Issued and outstanding – September 30, 2013 6,960,000 $0.70 4.2

The performance warrants are non-transferable, have a five-year life, and vest upon the sale of

substantially all of the Company’s assets, a corporate merger or sale where the common

shareholders receive cash or publicly-traded shares, or the Company is listed on a public stock

exchange, and the value attributed to each common share of the Company upon such event exceeds

the vesting price as stipulated in the plan. The performance warrant vesting prices are described in

the table below:

Performance warrant series

Portion of performance warrant issue

Vesting price

Series 1 Series 2 Series 3 Series 4

25% 25% 25% 25%

$1.05 $1.40 $1.75 $2.10

100%

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


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warrants to vest. Stock based compensation of $1,476,989 was expensed during the nine months

ended September 30, 2013.

11. Finance expenses:

Finance expenses

Three months ended

September 30, 2013

$

Nine months ended

September 30, 2013

$

Interest on bank loan 8,611 30,538 Interest on promissory notes (note 8) 177 1,479

Accretion of decommissioning liabilities (note 9) 41,772 119,621

Finance expenses total 50,560 151,638

12. Supplemental cash flow information:

Changes in non-cash working capital is comprised of:

Three months ended

September 30, 2013

$

Nine months ended

September 30, 2013

$

Changes in: Trade and other receivables (525,833) (1,216,623)

Prepaid expenses 42,109 16,846 Accounts payable and accrued liabilities 4,772,453 5,155,444

4,288,729 3,955,667

Allocated to: Operating 92,589 (505,203) Investing 4,196,140 4,460,870

4,288,729 3,955,667

13. Related party:

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

the three and nine months ended September 30, 2013, the Company recorded $5,923 and $147,640

respectively in general and administrative expenses related to this law firm. At September 30, 2013,

$4,467 remained in accounts payable.

14. Capital management:

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

the bank loan.


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September 30, 2013 $

Current assets* 9,851,725 Accounts payable and accrued liabilities (7,331,296) Promissory notes (25,114)

Net working capital 2,495,315

Maximum value of bank loan Amount drawn

13,500,000 -

Unutilized bank loan 13,500,000

Net available funds 15,995,315

*Excludes non-cash commodity price contract asset

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

of $30.7 million was approved. To September 30, 2013, total capital of $21.5 million was expended,

including a property acquisition of $3.3 million and a property disposition with proceeds of $1.9

million. In April and September, 2013, an $8.0 million and a $9.0 million draw on the line of equity,

respectively, were received. The Company expects the current available funds, bank loan, line of

equity, and anticipated cash flow will be able to fund its remaining capital program for 2013.

During the nine months ended September 30, 2013, the Company negotiated a new bank loan with a

Canadian financial institution for $9.0 million, which was increased to $13.5 million in July, 2013,

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 October 1, 2013. No funds have been drawn from this

bank loan to date.




15. Commodity price contracts

During the nine months ended September 30, 2013, the Company entered into two commodity swap

contracts each for 100 barrels of oil per day. The first contract fixes the price at $90.02 of crude oil at

Edmonton per barrel settling monthly from May 1, 2013 to December 31, 2013. The second contract

fixes the price of crude oil at $101.35/bbl calculated as West Texas Intermediate converted to

Canadian dollars from August 1, 2013 to July 31, 2014. The Company recognized realized losses for

the three and six months ended September 30, 2013 of $192,877 and $214,989 respectively, and

unrealized gains of $233,300 and $58,800 for the same periods.

16. Financial risk management:

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

accounts payable, promissory notes, and the bank loan. The main purpose of these financial


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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 8), and therefore the carrying value

approximates their fair value.

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.


Amounts due from marketers Joint venture GST receivable

1,727,477 44,412

206,414

Total 1,978,303

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

major clients. At September 30, 2013, no impairment was deemed necessary, so no allowance for

doubtful accounts was recognized.

As at September 30, 2013, the Company’s trade and other receivables are aged as follows:


Current 30 – 60 days 60 – 90 days Over 90

1,922,909 5,390

18,920 31,084

Total 1,978,303


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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 14, the Company

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

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 $9.18/bbl, and a cash flow change of

$933,675 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. In July

2013, the Company entered into a financial transaction from August 1, 2013 to July 31, 2014 to

fix the price of 100 barrels of oil per day at $101.35/bbl calculated as West Texas Intermediate

converted to Canadian dollars (Note 15).

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 September

30, 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.

17. Commitments:

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

terminated on July 31, 2013:

Total at September 30, 2013

$

2013 2014-2018 2019-2022

35,441 760,461 494,711

Total 1,290,613


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18. 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.

19. Events after reporting period:

Bank loan (Note 7)




Corval Energy Ltd. General Information

- 34 -

Directors Jody Forsyth

(2)(3) - Chairman

Larry Evans (1)(2)

Brian Frank

(1)(3)

Ron McIntosh (2)(3)

Thomas Stan David Eastham

(1)

(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 Corporate secretary Burnet, Duckworth, and Palmer LLP

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 - september 2013

Documents

quarter corval

corval energy

barrels of oil

successful wells

gross wells

net wells

oil treater

quarter results