Cub Energy Inc. Financial Results For Nine Months (In US Dollars. Multiple By 1.33 For CAD Value)

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ASSETS

Cash: $7,515,000

Prepaid Expenses: $978,000

Receivables: $257,000

Equity Investment: $9,912,000 

Property & Equipment: $4,923,000

Non-Current Receivables: $842,000

Total Assets: $24,427,000  (June Asset Value: $23 million, increase of $1.4 million in assets)

Liabilities 

Payables: $4,022,000

Loan from KUB-Gas: $5,917,000

Shareholder Loan: $2,000,000 - From CEO who owns majority of CUB shares

Provisions: $588,000

Total Liabilties: $12,527,000 (June Liabilities: $12.444 million)

MD&A Highlights:

• The Company reported income from equity investment of $2,350,000 during the nine months ended

September 30, 2019 as compared to income of $4,953,000 in the comparative 2018 period.

• The Company reported net income of $260,000 or $0.00 per share during the nine months September

30, 2019 as compared to net income of $2,508,000 or $0.01 per share during the same period in 2018.

• The Company recorded $2,790,000 in dividends during the nine months September 30, 2019

compared with $3,847,000 in dividends in the comparative 2018 period. 

• Production averaged 824 boe/d (97% weighted to natural gas and the remaining to condensate) for

the nine months September 30, 2019 as compared to 826 boe/d for the 2018 comparative period.

• Netbacks of $18.49/boe or $3.08/Mcfe were achieved for the nine months September 30, 2019 as

compared to netback of $27.22/Boe or $4.54/Mcfe for the comparative 2018 period.

• Achieved average natural gas price of $5.85/Mcf and condensate price of $48.43/bbl during the nine

months September 30, 2019 as compared to $7.47/Mcf and $59.80/bbl for the same period in 2018.

• CNG drilled the U101 well that showed that the prospective reservoir sands were water saturated with

traces of natural gas that indicate there was gas migration, but no viable trapping mechanism in this

particular prospect. The U101 well obtained valuable subsurface geological and petrophysical data

that will be used to refine the seismic mapping and geo-modelling prior to drilling additional wells on

the license. This upcoming study may result in revising the drilling priorities for the identified prospect

inventory.

• Kub-Gas expects to drill a new well called Makeevskoye-30 (“M-30”). The Makeevskoye licence has

produced nearly half of the historical production for Kub-Gas. The M-30 well is expected to spud in Q1

2020.

• During the quarter ended September 30, 2019, Kub-Gas performed a recompletion of the Olgovskoye18 (“O-18”) well in the B-8-9 reservoir which resulted in a 30% increase in production and the well is

now producing at a combined rate of approximately 0.9 million cubic feet per day (“MMcf/d”). KubGas uses its own completion equipment and personnel.

• The Company has determined that the Nitrogen Rejection Unit (“NRU”) requires process

improvements before it can be deployed to Ukraine. The Company is currently negotiating with

engineering firms to complete the required modifications.

Eastern Ukraine KUB-Gas Assets (35%)

Kub-Gas expects to drill the M-30 well in Q1 2020. The Makeevskoye licence has produced nearly half of the

historical production for Kub-Gas. The M-30 well will target the M-7 horizon.

Kub-Gas recompleted the Olgovskoye-7 (“O-7”) well to the M6v which increased its production to 0.6 MMcf/d.

The M6v is a relatively small gas reservoir and the current rate is approximately 0.3 MMcf/d. Kub-Gas also

recently recompleted two other wells for a combined additional increase of approximately 0.35 MMcf/d in

field production. During the quarter ended September 30, 2019, Kub-Gas performed a recompletion of the O18 well in the B-8-9 reservoir which resulted in a 30% increase in production and the well is now producing at

a combined rate of approximately 0.9 MMcf/d. Kub-Gas uses its own completion equipment and personnel, so

the costs are associated with materials and outside services as needed for particular activities. There are

approximately ten other wells with “behind pipe pays” that may be attractive recompletion opportunities in

the Olgovskoye License. As the currently producing intervals deplete, the production team can recomplete

these additional zones in the existing wells.

On the West Olgovskoye licence, Kub-Gas expects to commence a 270 km2 3D seismic program in 2020 to

delineate known structures found from 2D seismic.

Western Ukraine CNG Assets (50% Interest)

In western Ukraine, CNG drilled the U101 well that showed that the prospective reservoir sands were water

saturated with traces of natural gas that indicate there was gas migration, but no viable trapping mechanism

in this particular prospect. The U101 well obtained valuable subsurface geological and petrophysical data that

will be used to refine the seismic mapping and geo-modelling prior to drilling additional wells on the license.

This upcoming study may result in revising the drilling priorities for the identified prospect inventory. The costs

of drilling the first three wells will be incurred 100% by our partner.

Western Ukraine Tysagaz Assets (100% Interest)

The RK field was temporarily suspended on April 1, 2016 because the nitrogen concentration exceeded the

allowable limit stipulated by the gas pipeline operator. The Company is currently selling a modest amount of

rich gas from a deep well to evaluate the Mesozoic formation on the RK field.

During the nine months ended September 30, 2019, and due to continued delays in the completion of the NRU,

the Company and the NRU manufacturer entered into a mutual release agreement, including the release of

the arbitration claim, in exchange for the Company taking physical possession of the NRU “as is”. The Company

has determined that the NRU requires process improvements before it can be deployed to Ukraine. The

Company is currently negotiating with engineering firms to complete the required modifications

Foreign Currency Translation Income/Loss

During the third quarter ended September 30, 2019, the foreign currency translation income was $1,832,000

as compared to a loss of $1,721,000 in the comparative 2018 quarter. The foreign currency translation income

was $3,011,000 during the nine months ended September 30, 2018 as compared to a loss of $376,000 in the

comparative 2018 period. The income and losses relate to the revaluation of the Company’s foreign assets and

liabilities from the local currency (Ukrainian, Canadian and European currencies) to the US dollar in accordance

with the Company’s accounting policy for the translation of its subsidiaries. The recent foreign currency

translation income was primarily the result in the strengthening of the Ukrainian Hryvnya against the US dollar.

The carrying value of the assets of the Ukrainian subsidiaries were materially impacted by the volatility of the

local currencies in the past. The appreciation/devaluation materially raises/lowers the carrying value of the

Ukrainian property, plant and equipment and the value of the equity investment in KUB Holdings. These

gains/losses do not impair the ability of those assets or liabilities to perform their intended purpose.

Liquidity, Capital Resources and Financings

At September 30, 2019, the Company had a cash balance of $7,515,000 (December 31, 2018 - $7,236,000) and

working capital deficit of $1,189,000 (December 31, 2018 – working capital of $3,798,000). The working capital

was largely impacted by the Kub Gas loans being classified as current liabilities as a result of callable feature

allowing the loans to be called any time before the maturity date of December 31, 2020. The Kub Gas loans

amount to $5,917,000. The Company had no long-term debt or capital leases other than the Pelicourt loan.

The Company has historically been able to raise funds through the issuance of common shares or debt although

there are no assurances funds will be able in the future.

The Company has a $2,000,000 secured shareholder loan with Pelicourt, a related party to the Company. The

shareholders loan bears interest at 12% per annum payable quarterly and the principal of the shareholder loan

is due on January 31, 2021. Pelicourt was granted security over Gastek which indirectly owns the 35% interest

in KUB-Gas. The security is available on an event of default and limited only to the amount owing on the

shareholder loan including principal and interest.

In June 2017, the Company entered into a second shareholder loan agreement with an officer of the Company.

The shareholder loan is for $1,000,000 with an annual interest rate of 6% payable monthly. The shareholders

loan was repaid in four equal quarterly installments and repaid in full on June 30, 2019.

During the nine months ended September 30, 2019, the Company received $2,790,000 in dividends from KUB

Holdings as compared to $3,847,000 in dividends in the 2018 comparative period.

During the nine months ended September 30, 2019, the Company expended $9,000 on capital expenditures as

compared to $219,000 in the 2018 comparative period, which was largely related to the NRU.

During the nine months ended September 30, 2019, KUB-Gas incurred approximately $1,226,000 (2018 -

$3,444,000) of capital expenditures on property, plant and equipment which was the workovers in 2019 and

primarily the NY-3 well in 2018. CNG expended approximately $1,670,000 for drilling the U101 well during the

nine months ended September 30, 2019 as compared to $71,000 in the 2018 comparative period. The CNG

capital expenditures are largely paid by the company’s 50% equity partner.

There remains significant doubt about the ability of the Company to continue as a going concern and meet its

obligations as they become due.

Outlook

In eastern Ukraine, Kub-Gas is focused on drilling the Makeevskoye-30 (“M-30”) well in Q1 2020 and evaluating

additional recompletion operations given the success of recompletions in 2018 and 2019. Kub-Gas expects to

commence a 3D seismic program in 2020 on the West Olgovskoye licence to delineate known structures found

from 2D seismic.

In western Ukraine, CNG is utilizing the valuable subsurface data from the U101 well and refining its model to

determine the next drilling priorities. The costs of drilling the first three wells will be incurred 100% by our

partner.