Third Quarter Oil & Gas Update - KPMG | US€¦ · Third Quarter Oil & Gas Update ... Oil Mixed Gas Market metrics –2P reserve metrics Source: Sayers Energy Advisors and publicly

Third Quarter Oil & Gas UpdateCalgary, AB

—

September 30th, 2016

Welcome

Michael McKerracher

National Energy Leader

3© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights

reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

New partner announcement

Catherine Buhmiller

Partner, Tax

Marcello D’Egidio

Partner, Tax

Narmin Vasanji

Partner, Advisory

Kimberly Payne

Partner, Audit

Susanne DiCocco

Partner, Advisory

David Yung

Partner, Audit



Agenda• Market activity overview – Chris Chan

• Regulatory update and impairment – Shane Doig

• Accounting updates – Reinier Deurwaarder

• Alberta carbon levy – Jeff Smith

• Tax dispute resolution update – Michel Bourque

• Cyber security – The Digital Privacy Act – Jeff Thomas

• Questions

Market activity overview

Chris Chan

Partner, Advisory



• Low price environment with continuing risk of global oversupply of oil

• Continuing decline in drilling activity

• Limited capital availability

• Limited transactions

• Focus on capital efficiency and declining costs

• Importance of infrastructure assets

Current environment and challenges



• Buyers market

• Strategic or high quality economic asset acquisitions (similar asset/play)

• Targets with leverage challenges or lack capital access to further develop asset base

• Non-cash transactions

• Greater focus on value for producing over undeveloped assets

Transaction themes



• Comparison of transaction metrics over the past several years

• Further decline in oil weighted metrics while balanced and gas weighted assets have improved

slightly

• Oil transaction metrics similar to balanced asset metrics

Market metrics



15.73

19.41

13.03

10.42 8.62 8.19

11.14 10.81

7.45 9.14

5.75 5.90 5.91

2.94 3.70

0.0

5.0

10.0

15.0

20.0

25.0

2013 2014 2014 Q4 2015 2016 YTD

$/B

OE

-2P

Rese

rve

Median Transaction Metrics ($/BOE) - By Reserve Mix

Oil Mixed Gas

Market metrics – 2P reserve metrics

Source: Sayers Energy Advisors and publicly available information



Market metrics – 1P reserve metrics

21.70

24.54

12.99

16.96

11.34

14.02

17.90 17.20

11.40 11.65

6.88

9.71 10.98

5.37 6.57

0.0

5.0

10.0

15.0

20.0

25.0

2013 2014 2014 Q4 2015 2016 YTD

$/B

OE

-1P

Rese

rve

Median Transaction Metrics ($/BOE) - By Reserve Mix

Oil Mixed GasSource: Sayers Energy Advisors and publicly available information



Market metrics – Flowing barrel metrics

78,367

92,394

85,455

48,165 48,902

30,750

57,726 57,726

39,765

54,783

24,000

32,953

46,333

16,669 18,165

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2013 2014 2014 Q4 2015 2016 YTD

$/B

OE

PD

Median Transaction Metrics ($/BOEPD) - By Reserve Mix

Oil Mixed GasSource: Sayers Energy Advisors and publicly available information



• Significant decline on overall industry average drilling and completion costs

• Average drilling and completion cost reduction of approximately 10% to 15% in 2015 and a further

30% in 2016

• Longer wells and increasing number of stages resulting in greater costs efficiency with average

drilling and completion cost per stage decreasing by approximately 30% to 35% in 2015 and a

further 25% to 30% in 2016

Cost efficiency



Cost efficiency

0

50

100

150

200

250

300

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2012 2013 2014 2015 2016

Average Drilling and Completion Costs

Total D&C Costs Average Cost per Stage

Source: Canadian Discovery Frac Database



• Stabilization of near term WTI prices in the US$40-US$50 range since trough in February 2016

• Future prices remain steady with slight increase since December 2015

• Anticipate engineer price decks to remain similar in Q3

Price decks and price curves




76.7

67.9

44.7

48.4 48.4

62.6 61.9

40.7

49.4

45.3 44.8

30.00

35.00

40.00

45.00

50.00

55.00

60.00

65.00

70.00

75.00

80.00

12/31/2014 6/30/2015 12/31/2015 6/30/2016 8/31/2016 9/23/2016

2016 WTI - Price Deck vs Future Price

Engineer Price Deck Future Price

?

Source: Bloomberg



83.3

72.6

55.2 56.2 56.2

66.663.4

46.1

52.248.5 48.0

30.00

35.00

40.00

45.00

50.00

55.00

60.00

65.00

70.00

75.00

80.00

85.00

12/31/2014 6/30/2015 12/31/2015 6/30/2016 8/31/2016 9/23/2016

2017 WTI - Price Deck vs Future Price

Engineer Price Deck Future Price

?


Source: Bloomberg



• Q3 price related impairment triggers unlikely

• Need to continue to evaluate potential impact of capital budget changes on underlying reserves

• Consideration of consistency in fair value assessment between acquisitions completed during the

year to yearend impairment, if required.

Fair value considerations

Regulatory update and impairment

Shane Doig

Partner, Audit



CSA Notice 51-346 Continuous Disclosure Review Program - Fiscal 2016

Financial Statement deficiencies

• Market risk - sensitivity analysis

• Contingent consideration in business combinations

• Goodwill and intangible assets recognized in business combinations

• Functional currency

• Operating segment aggregation

• Credit risk disclosure

MD&A deficiencies

• Liquidity and capital resources

• Forward looking information

• Overall performance (discussion of operating segments)

• Non-GAAP financial measures disclosures

Regulatory update



CSA Notice 51-346 Continuous Disclosure Review Program - Fiscal 2016

Other

• Material contracts

• Audit committee composition – venture issuers

• Management information circular

• Annual information form

• Insider reporting

• Oil and gas reporting

Regulatory update



A few items to keep on your radar from the TSX:

TSX Disclosure Requirements for Compensation Arrangements – comment period ended

June 2016

• Expanded disclosures around multipliers

• Several other disclosure amendments and alterations

TSX Proposes Issuer Website Disclosures – comment period ended June 2016

• Considerable information would be required to be retained on your website such as

• Constating documents

• Security holder rights plans

• Stock based compensation plans

• Various governance documents (position descriptions, charters, etc.)

Regulatory update



The new audit report – aka the “long form report”

• Significant audit areas are discussed in your audit report

• Disclosure of audit partner responsible

What is the current status of the legislation

• International – effective for years ending on or after December 31, 2016

• Canada – considering deferral from 2017 to 2018 (for TSX and into 2019 for TSX-V). Currently

early adoption is not permitted

• United States – re-exposure draft has been issued and no adoption date has been set

Regulatory update



Will triggers occur in Q3 or Q4

• Now more than ever difficult to predict what will occur

• “System wide” impairment may be less likely in 2016 than in the prior year

• Individual facts and circumstances will need to be considered very closely

Some things to consider

• No triggers for impairment

• Considerable area of judgment – disclosures adequate?

• Triggers for impairment

• Treatment of ARO in the impairment test given new IFRIC guidance

• Given ARO fair value will not equal value in use – need to consider both more closely

• Be careful in your disclosure – did you use FVLCS or VIU

• Other disclosures – sensitivities and recoverable amount

Impairment



Impairment and AROFair value less cost to sell Value in use

Discounted reserves (i.e. 2P 15% with ARO from

the RR added back)

100 100

Costs to sale (5)

ARO – discounted at market rate (10)

ARO – provision as recorded in the F/S (30)

Recoverable amount 85 70

Net book value 120 120

ARO per the F/S (30) (30)

Net of ARO book value 90 90

Impairment (5) (20)

Accounting updates

Reinier Deurwaarder

Partner, Audit



• IFRS 15 / ASC 606 – Revenue from Contracts with Customers

• IFRS 16 / ASC 842 – Leases

• IFRS 9 – Financial Instruments

• Extractive Sector Transparency Measures Act (ESTMA)

Accounting updates



IFRS 15 - The five step model – A refresher 2018

Source: KPMG

Identify the contract with a customer1

Identify the performance obligations2

Determine the transaction price3

Allocate the transaction price4

Recognize revenue5

5

4

Step 3

3

2

1

Revenue

The new Revenue Standard also includes guidance for specific situations



IFRS 15 - The journey matters



IFRS 15 - What have we seen?1

2

3

4

5

Progress is limited

Surprises

Scoping the project is difficult

Not just an accounting project

Differences



IFRS 16 – A refresher 2019

All major leases on-balance sheet

Balance sheet P&L

Asset

Liability

Depreciation

+ Interest

= Front-loaded total lease expense

= ‘Right-of-use’ of underlying asset

= Obligation to make lease payments

Lease expense



IFRS 16 – Transition overview: Lessee operating lease

Applying lease

definition

Apply

recognition

exemptions?

Select transition

option

Full

retrospective

Modified

retrospective

Identifying the population Applying the standard

Source: KPMG



New financial instruments standard:

• Classification & Measurement

• Impairment

• Hedge accounting

IFRS 9 - Refresher

Financial assetsAR allowance

2018



ESTMA - Refresher

Source: http://eiti.org/countries

Canada:

Extractive

Sector

Transparency

Measures Act

US: Dodd

Frank Act

Section 1504

(consultation)

Norway:

Extractive

industry

country-by-

country

reporting

EU: Accounting

& Transparency

Directive

UK: Report on

payment to

Governments

Regulations 2014

OECD: Base

Erosion Profit

Shifting (BEPS)

–

Country-by-country

reporting by multinationals operating in

OECD or G20 countries.

Australia: Corporations

Amendment (Publish

What You Pay) Bill 2014

(pending)

EITI Candidate Country – Implementing EITI, not yet compliant

Other

EITI Compliant Country – confirmed to have met all EITI requirements

Suspended – Compliant/Candidate status is temporarily suspended

• On June 1, 2015 the Extractive

Sector Transparency Measures Act

(the Act / ESTMA) came into force.

• The Act requires extractive entities

to report annually on payments

made to governments relating to the

commercial development of oil, natural

gas, or minerals, at home and abroad.

• ESTMA delivers on Canada’s

international commitments to

contribute to global efforts to increase

transparency and deter corruption

in the extractive sector.

2016



• Project status

• Internal responsibilities

• Guidance

• ESTMA goal – compliance or communication

ESTMA- What have we seen?

Alberta carbon levy

Jeff Smith

Senior Manager, Indirect Tax



Where do we stand today?

Two current pieces of legislation

• Bill 20 – Climate Leadership Implementation Act - passed on June 7, 2016.

• Specified Gas Emitters Regulation (“SGER”) (to the Climate Change and Emissions

Management Act)

One outstanding piece of legislation

• Regulations to Climate Leadership Implementation Act

Alberta carbon levy



Alberta carbon levy - Framework

• Impacts Large Final Emitters (“LFE”)

(> 100,000 tonnes of C02e)

• SGER requires that performance

improves year over year based on a

baseline emissions test

• Covers 45% of emissions in the

province today

• Price will increase from $15 today to

$20 (2017) and $30 (2018)

Specified Gas Emitters

Regulation (“SGER”)

• Impact to consumers of fuels

• Estimated that it will cover an

additional 45% of emissions

New Carbon Levy

Source: KPMG



Alberta carbon pricing - Framework

New Alberta Carbon

Levy

• SGER to be replaced with Climate

Competitiveness Regulation (CCR) in

2018

• $15 per tonne increased to $20 and

then $30

Framework for LFEs

• $ per litre

• Collection mechanism – security vs

tax

• Upstream/Midstream vs Downstream

Framework for Distribution of Fuels

• Required Retrofitting of Pneumatic

Pumps

• Exemptions until 2023

Framework for Conventional Drilling

• Phase out of coal

• Collection on retail sales

Framework for Power Generation

Source: KPMG



Direct Remitters

• Registration requirement for sellers of fuel

• Proposed licensing requirement to manage exempt purchases/self-assessments

• May be required to register even where making all exempt sales

Self-Assessment of Levy

• Requirement to report and self-assess levy where consumption of own fuel

Exemptions

• Identify and manage exempt purchases to ensure proper payment of levy

Alberta carbon levy – Overview



Specific Exemptions

• Consumer with exemption certificate

• Consumer using fuel in SGER facility

• Consumer for prescribed use (as prescribed in the regulations)

• Consumer uses the fuel before 2023 as set out in the regulations

• Consumer of fuel used in farming

• Consumer uses fuel that is not combusted:

• As a raw material in an industrial process that produces another fuel

• As a raw material in an industrial process that produces something other than fuel

• As a solvent or diluent in a pipeline

• For prescribed use

We’re going green – Alberta carbon levy



2023 Exemption

• Available for fuel consumed in conventional oil and gas activities

• Uncertainty to what constitutes “conventional”

• Further uncertainty whether this extends to all fuel consumed – early indication was that it would

only be available for “own use” fuel (i.e. would not be available to fuel purchased from a third

party)

Licensing and Registration

• Indication that TRA would prefer to manage wholesalers and exporters with licensing - may be

administrative in nature

SGER Reporting Facilities

• Analysis to whether more beneficial to report under SGER – opt in election not currently being

considered

• Management of exemptions

Alberta carbon levy – Expected in regulations



Type of Fuel January 1, 2017 Rate ($20/ton) January 1, 2018 Rate ($30/ton)

Aviation Jet Fuel 5.17 ¢/L 7.75 ¢/L

Aviation Gas 4.98 ¢/L 7.47 ¢/L

Bunker Fuel 6.36 ¢/L 9.55 ¢/L

Butane 3.56 ¢/L 5.34 ¢/L

Coal Coke $63.59 /ton $95.39 /ton

Coke Oven Gas 1.40 ¢/m3 2.10 ¢/m3

Diesel 5.35 ¢/L 8.03 ¢/L

Ethane 2.04 ¢/L 3.06 ¢/L

Gas Liquids 3.33 ¢/L 4.99 ¢/L

Gasoline 4.49 ¢/L 6.73 ¢/L

Heating Distillate Oil 5.51 ¢/L 8.27 ¢/L

Heavy Fuel Oil 6.35 ¢/L 9.53 ¢/L

High Heat Value Coal $44.37 /ton $66.56 /ton

Kerosene 5.14 ¢/L 7.71 ¢/L

Locomotive Diesel 5.94 ¢/L 8.90 ¢/L

Low Heat Value Coal $35.39 /ton $53.09 /ton

Methanol 2.18 ¢/L 3.26 ¢/L

Naphtha 4.49 ¢/L 6.73 ¢/L

Natural Gas $1.011 /GJ $1.517 /GJ

Non-Marketable or Raw Gas $1.150 /GJ $1.720 /GJ

Pentanes Plus 3.82 ¢/L 5.73 ¢/L

Propane 3.08 ¢/L 4.62 ¢/L

Refinery Gas 3.77 ¢/m3 5.65 ¢/m3

Refinery Petroleum Coke $63.86 $/ton $95.79 $/ton

Upgrader Petroleum Coke $58.50 $/ton $87.75 $/ton

Source: Alberta Finance, 2016 Tax Plan

Alberta - Carbon levy rates by type of fuel



• No regulations = No certainty but should be front of mind especially where new accounts and IT

systems are impacted

• Likely necessary for various functions to collaborate, especially those impacted by both SGER

and Carbon Levy

• May be a very short window to obtain registration and licenses – be prepared

Alberta carbon levy – Final thoughts

Tax dispute resolution update

Michel Bourque

Partner, Tax, KPMG Law LLP



Tax dispute resolution update

Tax authority initiatives

Tax authority areas of focus

Encouraging developments in recent Tax Court of Canada appeals

Cyber security – The Digital Privacy Act

Jeff Thomas

Partner, Advisory



Setting the stageRegulatory responses

Europe

• General Data Protection Regulation

US

• State level

• Financial Sector – Gram-Leach-Bliley

• Health Information – Health Insurance Portability and

Accountability Act, American Recovery and Reinvestment Act

• US Personal Data Notification and Protection Act (draft)

Provinces

• Various acts



The Digital Privacy Act - BackgroundBackground

• Digital Privacy Act (formerly Bill S-4) produced significant amendments to the Personal

Information Protection and Electronic Documents Act (PIPEDA)

• Royal Assent in June 2015 (many aspects already in force)

• “Breaches of Security Safeguards” deferred pending development of associated regulation

• Draft Breach Notification and Regulations issued for discussion March 2016

• Final Regulations are expected this fall

Today’s discussion will focus on the changes related to Breaches of Security Safeguards



The Digital Privacy Act – Your obligationsBreach disclosure obligations

Organizations must report

• To the Office of the Privacy Commissioner of Canada (OPC)

• Notify affected individuals

• To relevant third parties

About

• Breaches of Security Safeguards

• That pose a “real risk of significant harm” to affected individuals



The Digital Privacy Act – Your obligations

Breach

• Personal information is lost, or accessed by an

unauthorized individual

• The loss or access is a result of a violation of the

organization’s security safeguards, or the failure to

establish such safeguards

Significant harm

• Bodily harm, humiliations, damage to reputation or

relationships, loss of employment or business

opportunities, financial loss

• Organizations must consider the sensitivity of the

information and the probability it will be misused

Notification

• Required as soon as feasible after an organization

determines a breach has occurred

• Must notify third parties who could reduce the risk

or mitigate harm (ex. law enforcement)

Record keeping

• Maintain a record of all breaches involving personal

information, and

• Provide the OPC with the record on request

Penalties

• Failure to report to OPC or affected individuals, or

to maintain a record of all breaches

• Maximum fine of $100,000

Definitions



The Digital Privacy Act – When to reportDetermining real risk of significant harm

• Organizations must conduct a situational analysis to determine whether or not the breach poses a

“real risk of significant harm”

• Context of the breach is seen as critical and therefore even seemingly innocuous information

could have seriously harmful information

Factors to consider include

• The nature of the information and its sensitivity, whether it is anonymized or encrypted, and

whether it can inflict harm

• The cause and extent of the breach

• The individuals affected, including their number and relationship to the organization

(customers/clients, employees, etc.)

• Foreseeable harm

Consider the need to review related policies, procedures, monitoring, and record keeping



The Digital Privacy Act – What to reportReporting objective

• Enable OPC to provide oversight and compliance

• Standardized tracking of breaches

Current OPC voluntary reporting includes

• Date and location of the breach and date of its discovery

• Description of the incident

• Cause of the breach

• Estimated number of individuals affected

• Relation of individuals to the organization (employee, customer, etc.)

• Type of information involved

• Measures taken by the organization to contain the breach

• Whether anyone else has been notified of the incident (affected individuals, law enforcement, third

parties) and when



The Digital Privacy Act – Reporting timelineCurrent state for voluntary OPC reporting

• “As soon as feasible after the organization determines a breach has occurred”

• Designed to allow time to deal with the breach

• Recognizes that breach information may develop over time

Other considerations

• EU ePrivacy Directive requires initial reporting in 24 hours

• Should early reports be updated as new information is determined? At what frequency?



The Digital Privacy Act – Notification requirementsNotification to affected parties

Content

• “The notification shall contain sufficient information to allow the individual to understand the significance to

them of the breach and to take steps, if any, to reduce the risk of the harm that could result from it or to

mitigate that harm”

• Content requirements vary across provinces and countries

• Europe has the most detailed requirements including “likely consequences of the breach to the individual” and

“steps the organization has taken to mitigate the risk”

• US notifications are often seen as confusing and containing too much legalese – making it difficult for affected

individuals to understand the potential impact of the breach

Delivery

• Affected individual must clearly understand that their personal information has been compromised and they

are at risk of potential harm

• Communicated directly to the individual in a manner that ensures it is not confused with “junk mail”

• Flexibility allowed to suit the circumstances, the organization, and the affected individuals

• Existing delivery requirements vary widely by jurisdiction



The Digital Privacy Act – Notification requirementsNotification to third parties

“An organization that notifies an individual of a breach of security safeguards …shall notify any other

organization, a government institution, …of the breach if the notifying organization believes that the

other organization or the government institution …may be able to reduce the risk of harm that could

result from it or mitigate that harm, or if any of the prescribed conditions are satisfied.”

OPC currently specifies the following organizations for consideration:

• Law enforcement agencies, if theft or crime is suspected

• Insurance companies, if required by contract

• Professional or other regulatory bodies, as requires by professional or regulatory standards

• Credit card companies, financial institutions, credit reporting agencies, if required to mitigate harm

• Union or employee bargaining units, if the breach involves their members

Reporting requirements vary considerably across geographies.



The Digital Privacy Act – Record keepingOrganizations that become aware of a breach of security safeguards must keep and maintain a

record of the breach, regardless of the conclusion of their situational analysis into whether the

breach poses a “real risk of significant harm”.

Objective

• Allow the Privacy Commissioner to execute their oversight and compliance mandate

• Force organizations to systematically document breaches, regardless of risk or severity, to enable

organizations to take action to systemic problems and reduce the risk of future harm

Existing record keeping frameworks include information such as

• Details of the breach

• Risk assessment demonstrating the assessment of probability of harm - including where the risk

is assessed as low

• Remedial actions taken



The Digital Privacy Act – Next stepsConsider understanding and assessing maturity of:

• Inventory of personal information

• Risk assessment of personal information

• Information security safeguards over personal information

• Breach detection and incident response processes

• Process for risk assessment of breach

• Record keeping

• Monitoring and compliance processes

• Regulatory compliance processes



Data Breach Preparation and ResponseAbout the book

The first book to provide 360 degree visibility and guidance on how to proactively

prepare for and manage a data breach and limit impact.

• Defines breach response plan requirements and describes how to develop a

plan tailored for effectiveness within your organization

• Covers critical first-responder steps and breach management practices,

including containing a breach and getting the scope right, the first time

• Offers guidance on how to manage internal and external breach

communications, restore trust, and resume business operations after a breach,

including the critical steps after the breach to reduce breach-related litigation

and regulatory fines

About the author

Kevvie Fowler is a Partner and National Cyber Response Leader for KPMG

Canada and has over 19 years of IT security and forensics experience. He is an

instructor who trains law enforcement agencies on cyber forensic and response

practices. Credited with advancing the field of digital forensic science, Kevvie is a

SANS lethal forensicator and sits on the SANS Advisory Board where he guides the

direction of emerging security and forensics research.

Contact partner for more information

about obtaining a copy

Questions?

Today’s presentation will be posted to

kpmg.ca/oilandgas

Thank you

kpmg.ca

© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member

firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG

name and logo are registered trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular

individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such

information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on

such information without appropriate professional advice after a thorough examination of the particular situation.

http://kpmg.com/socialmedia