ITEM 1B:
UNRESOLVED STAFF COMMENTS
None.
The Company is a defendant in a lawsuit filed on November 20, 2008, in the United States District Court for the District of Colorado by Jack J. Grynberg and three affiliated companies. The suit alleged bribery and other misconduct and challenged the propriety of a contract awarded to the Company’s wholly-owned subsidiary Ivanhoe Energy Ecuador Inc. to develop Ecuador’s Pungarayacu heavy oil field. The plaintiff’s claims were for unspecified damages or ownership of the Company’s interest in the Pungarayacu field. The Company and related defendants filed motions to dismiss the lawsuit for lack of jurisdiction. The Court granted the motion and dismissed the case without prejudice. The Court granted Mr. Robert Friedland’s request to sanction plaintiffs and plaintiffs’ counsel for their conduct related to bringing the suit by awarding Mr. Friedland fees and costs. The Ivanhoe corporate defendants, including the Company, have been awarded their costs in defending the suit and have requested an award of attorneys’ fees.
On October 16, 2009, the plaintiffs filed a motion requesting that the Court vacate its judgment and allow discovery on jurisdictional issues on the grounds that plaintiffs had discovered new evidence. On July 15, 2010, the Court denied the plaintiffs’ motion to vacate the judgment. The request for attorneys’ fees remains pending before the Court. On August 13, 2010, the plaintiffs filed a notice of appeal challenging the district court’s judgment and some of its orders. The appeal is currently pending in the United States Court of Appeals for the Tenth Circuit. Briefing on the appeal is complete; the plaintiffs have filed an opening and reply brief and the Company and related defendants have filed a response brief. The Court has not announced whether it will hold oral argument on the appeal before it is decided. The likelihood of loss or gain resulting from the lawsuit, and the estimated amount of ultimate loss or gain, are not determinable or reasonably estimable at this time.
On December 30, 2010, the Company received a demand for arbitration from GAR Energy and Associates, Inc. (“GAR Energy”) and Gonzalo A. Ruiz and Janis S. Ruiz as successors in interest to and assignees of GAR Energy. The demand alleges breach of contract, fraud and other misconduct arising from a consulting agreement and various collateral agreements between GAR Energy and the Company relating to the Pungarayacu heavy oil field. The claimants seek actual damages of $250,000, a portion of the Company’s interest in the Pungarayacu field and other miscellaneous relief. The dispute is still in its early stages and arbitration proceedings, including discovery, have not yet commenced. The likelihood of loss or gain resulting from this dispute, and the estimated amount of ultimate loss or gain, are not determinable or reasonably estimable at this time.
PART II
ITEM 5:
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common shares trade on the Toronto Stock Exchange (the “TSX”) and The NASDAQ Capital Market (“NASDAQ”) under the symbols “IE” and “IVAN” respectively. The trading range of our common shares is as follows:
On December 31, 2010, the closing prices of our common shares were Cdn$2.72 on the TSX and $2.72 on NASDAQ.
As at December 31, 2010, a total of 334,365,482 of our common shares were issued and outstanding and held by 203 holders of record with an estimated 22,700 additional shareholders whose common shares were held for them in street name or nominee accounts.
DIVIDENDS
We have not paid any dividends on our outstanding common shares since we were incorporated and we do not anticipate that we will do so in the foreseeable future. The declaration of dividends on our common shares is, subject to certain statutory restrictions described below, within the discretion of our Board of Directors based on their assessment of, among other factors, our earnings or lack thereof, our capital and operating expenditure requirements and our overall financial condition. Under the Yukon Business Corporations Act, our Board of Directors has no discretion to declare or pay a dividend on our common shares if they have reasonable grounds for believing that we are, or after payment of the dividend would be, unable to pay our liabilities as they become due or that the realizable value of our assets would, as a result of the dividend, be less than the aggregate sum of our liabilities and the stated capital of our common shares.
EXEMPTIONS FROM CERTAIN NASDAQ MARKETPLACE RULES
As a Canadian issuer listed on NASDAQ, we are not required to comply with certain of NASDAQ’s Marketplace Rules and instead may comply with applicable Canadian requirements. As a foreign private issuer, we are only required to comply with the following NASDAQ rules: (i) we must have an audit committee that satisfies applicable NASDAQ requirements and that is composed of directors each of whom satisfy NASDAQ’s prescribed independence standards; (ii) we must provide NASDAQ with prompt notification after an executive officer of the Company becomes aware of any material non-compliance by us with any applicable NASDAQ Marketplace Rule; (iii) our common shares must be eligible for a Direct Registration Program operated by a clearing agency registered under Section 17A of the Exchange Act; and (iv) we must provide a brief description of any significant differences between our corporate governance practices and those followed by US companies quoted on NASDAQ.
Applicable Canadian rules pertaining to corporate governance require us to disclose in our management proxy circular, on an annual basis, our corporate governance practices, including whether or not our independent directors hold regularly scheduled meetings at which only independent directors are present, but there is no legal requirement in Canada for independent directors to hold regularly scheduled meetings at which only independent directors are present.
Although our independent directors hold meetings from time to time, as and when considered necessary or desirable by the independent lead director or by any other independent director, such meetings are not regularly scheduled.
ENFORCEABILITY OF CIVIL LIABILITIES
We are a company incorporated under the laws of the Yukon Territory of Canada. Some of our directors, controlling shareholders, officers and representatives of the experts named in this Annual Report reside outside the US and a substantial portion of their assets and our assets are located outside the US. As a result, it may be difficult to effect service of process within the US upon the directors, controlling shareholders, officers and representatives of experts who are not residents of the US or to enforce against them judgments obtained in the courts of the US based upon the civil liability provisions of the federal securities laws or other laws of the US. There is doubt as to the enforceability in Canada, against us or against any of our directors, controlling shareholders, officers or experts who are not residents of the US, in original actions or in actions for enforcement of judgments of US courts, of liabilities based solely upon civil liability provisions of the US federal securities laws. Therefore, it may not be possible to enforce those actions against us, our directors, officers, controlling shareholders or experts named in this Annual Report.
EXCHANGE CONTROLS AND TAXATION
There is no law or governmental decree or regulation in Canada that restricts the export or import of capital, or affects the remittance of dividends, interest or other payments to a non-resident holder of our common shares, other than withholding tax requirements.
There is no limitation imposed by the laws of Canada, the laws of the Yukon Territory, or our constating documents on the right of a non-resident to hold or vote our common shares, other than as provided in the Investment Canada Act (Canada) (the “Investment Act”), which generally prohibits a reviewable investment by an investor that is not a “Canadian”, as defined, unless after review, the minister responsible for the Investment Act is satisfied that the investment is likely to be of net benefit to Canada. An investment in our common shares by a non-Canadian who is not a “WTO investor” (which includes governments of, or individuals who are nationals of, member states of the World Trade Organization and corporations and other entities which are controlled by them), at a time when we were not already controlled by a WTO investor, would be reviewable under the Investment Act under two circumstances. First, if it was an investment to acquire control (within the meaning of the Investment Act) and the value of our assets, as determined under Investment Act regulations, was Cdn$5 million or more. Second, the investment would also be reviewable if an order for review was made by the federal cabinet of the Canadian government on the grounds that the investment related to Canada’s cultural heritage or national identity (as prescribed under the Investment Act), regardless of asset value (a “Cultural Business”). Currently, an investment in our common shares by a WTO investor, or by a non-Canadian at a time when we were already controlled by a WTO investor, would be reviewable under the Investment Act if it was an investment to acquire control and the value of our assets, as determined under Investment Act regulations, was not less than a specified amount, which for 2011 is Cdn$312 million. The Investment Act provides detailed rules to determine if there has been an acquisition of control. For example, a non-Canadian would acquire control of us for the purposes of the Investment Act if the non-Canadian acquired a majority of our outstanding common shares. The acquisition of less than a majority, but one-third or more, of our common shares would be presumed to be an acquisition of control of us unless it could be established that, on the acquisition, we were not controlled in fact by the acquirer through the ownership of common shares. An acquisition of control for the purposes of the Investment Act could also occur as a result of the acquisition by a non-Canadian of all or substantially all of our assets.
The Canadian Federal Government has brought forth certain amendments (the “Amendments”) to the Investment Act. Once they come into force, the Amendments would generally raise the thresholds that trigger governmental review. Specifically, with respect to WTO investors, the Amendments would see the thresholds for the review of direct acquisitions of control of a business which is not a Cultural Business increase from the current Cdn$312 million (based on book value) to Cdn$600 million (to be based on the “enterprise value” of the Canadian business) for the two years after the Amendments come into force, to Cdn$800 million in the following two years and then to Cdn$1 billion for the next two years. Thereafter, the threshold is to be adjusted to account for inflation. The Amendments will come into force when the government enacts regulations which, among other things, will provide how the “enterprise value” is to be determined.
The Investment Act also provides that the Minister of Industry may initiate a review of any acquisition by a non-Canadian of our common shares or assets if the Minister considers that the acquisition “could be injurious to (Canada’s) national security”.
Amounts that we may, in the future, pay or credit, or be deemed to have paid or credited, to shareholders as dividends in respect of the common shares held at a time when the beneficial owner is not a resident of Canada within the meaning of the Income Tax Act (Canada), will generally be subject to Canadian non-resident withholding tax of 25% of the amount paid or credited, which may be reduced under the Canada-US Income Tax Convention (1980), as amended, (the “Convention”). Currently, under the Convention, the rate of Canadian non-resident withholding tax on the gross amount of dividends paid or credited to a US resident that is entitled to the benefits of the Convention is generally 15%. However, if the beneficial owner of such dividends is a US resident corporation that is entitled to the benefits of the Convention and owns 10% or more of our voting stock, the withholding rate is reduced to 5%. In the case of certain tax-exempt entities, which are residents of the US for the purpose of the Convention, the withholding tax on dividends may be reduced to 0%.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
See table under “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” set forth in Item 12 in this Annual Report.
PERFORMANCE GRAPH
See table under “Executive Compensation” set forth in Item 11 in this Annual Report.
SALES OF UNREGISTERED SECURITIES
All securities we issued during the years ended December 31, 2010 and 2009, which were not registered under the Act, have been detailed in previously filed Form 10-Qs and Form 8-Ks.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
The financial data presented below has been revised to account for the sale of all of the Company’s US oil and gas exploration and production operations in 2009 as discontinued operations on a retroactive basis in accordance with generally accepted accounting principles (“GAAP”) in Canada. See Note 18 to the consolidated financial statements under Item 8 in this Annual Report.
RECONCILIATION TO US GAAP
Our consolidated financial statements have been prepared in accordance with GAAP in Canada, which differ in certain respects from those principles that we would have followed had our consolidated financial statements been prepared in accordance with GAAP in the US. The differences between Canadian and US GAAP, which affect our consolidated financial statements, are described in detail in Note 20 to our consolidated financial statements in this Annual Report. Had we followed US GAAP, certain selected financial information would have been reported as follows:
ITEM 7:
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following MD&A should be read in conjunction with the consolidated financial statements for the year ended December 31, 2010. The consolidated financial statements have been prepared in accordance with GAAP in Canada. The impact of significant differences between Canadian and US GAAP on the consolidated financial statements is disclosed in Note 20 to the consolidated financial statements. The date of this discussion is March 4, 2010. Unless otherwise noted, tabular amounts are in thousands of US dollars. Oil and gas volumes and reserves and related measures are presented on a working interest, before royalties basis.
EXECUTIVE OVERVIEW OF 2010 RESULTS
Production decreased in 2010 compared to 2009 as Ivanhoe’s working interest at Dagang, China was reduced to 49% upon the Company recovering its development costs in 2009. Although realized prices in 2010 were higher than in the past year, overall oil revenue declined due to lower production volumes. Lower revenue in combination with higher general and administrative costs resulted in additional cash flow used in operating activities in 2010 compared to 2009.
The net loss from continuing operations in 2010 improved over the prior year as the result of non-cash items. Lower depletion expense and an unrealized foreign exchange gain compensated for the decrease in revenue, the elimination of a future income tax recovery and higher stock-based compensation costs.
Capital expenditures totaled $86.3 million in 2010. A 28 well winter delineation program was completed in March 2010 at Tamarack. With the information gathered from the drilling program, Ivanhoe filed a comprehensive Environmental Impact Assessment with the Government of Alberta in November 2010. In support of the application, Basic Engineering and Design and Front End Engineering and Design were completed to generate a Class III (+25/-20%) capital cost estimate.
Two wells were drilled in the Pungarayacu field on Block 20 in Ecuador. The IP-5b well was drilled, perforated in the Hollin oil sands and steam was successfully injected into the reservoir resulting in production of heated heavy oil. The Company’s initial well, IP-15, encountered cementing and completion problems during steam injection operations and testing at the well was suspended without recovering oil.
Gas was discovered at the Zitong-1 and Yixin-2 wells drilled in the Zitong Block in China. Following initial flow and pressure tests, both wells have been shut-in for pressure build-up. In Dagang, one well was drilling at year end and five fracture stimulations were performed during 2010. In the Nyalga basin of Mongolia, additional 2D seismic was acquired and preparations were made for a further 2D seismic program and a drilling program.
HIGHLIGHTS
(1)
In July 2009, the Company disposed of its US operations and used the proceeds for its ongoing projects. To properly reflect this sale in the Company’s 2010 consolidated financial statements, the results of the US operations have been separately identified in comparative disclosures as “Discontinued Operations.”
CHANGE IN NET LOSS
The following quantifies year-over-year changes in the components of net loss realized in the years ended December 31, 2010, 2009 and 2008.
RESULTS OF OPERATIONS
Revenue
2010 vs 2009
Oil revenue in 2010 was lower than in 2009 as a result of lower production volumes, despite higher realized prices in the current year. Production in 2010 decreased primarily as a result of Ivanhoe’s working interest in the Dagang field decreasing to 49% in September 2009. The Company received a 2010 production quota of 70,000 gross tonnes or approximately 680 bbls/d net. The Company took advantage of this quota situation and performed certain maintenance workovers that normally would have been delayed. Production quotas in 2011 are set at 80,000 gross tonnes or approximately 1,600 bbls/d gross.
Dagang production is sold at the three month rolling average price of Cinta crude, which historically averages $3.00/bbl less than West Texas Intermediate (“WTI”). Following the increase in Cinta crude prices in 2010, our realized oil prices rose compared to 2009.
2009 vs 2008
Due to the combination of lower production and realized prices, oil revenue was lower in 2009 than in 2008. Production in 2009 decreased from 2008 due to normal field declines which were partially offset by productivity increases from adding new perforations, fracture stimulations and water flood response. In addition, Ivanhoe’s working interest in the Dagang field decreased from 82% to 49% in September 2009 upon the Company recovering its development investments.
Realized oil prices decreased 46% per barrel in 2009 compared to the prior year, consistent with the decline in Cinta crude.
Netbacks
(1)
Oil revenue per barrel, net operating revenue per barrel and net revenue (loss) from operations per barrel do not have standardized meanings prescribed by Canadian GAAP and therefore may not be comparable to similar measures used by other companies. Please refer to the Non-GAAP Financial Measures at the end of this MD&A for more details.
Operating Costs
2010 vs 2009
Operating costs on a per barrel basis rose in 2010, primarily as the result of an increase in the Windfall Levy administered in China due to higher realized oil prices in 2010 than in 2009. The Windfall Levy is imposed at progressive rates from 20% to 40% on the portion of the monthly weighted average sales price exceeding $40.00/bbl.
Higher field costs in 2010 also contributed to the increase in operating costs per barrel. Additional electrical and instrumentation costs were incurred in Dagang as we installed variable frequency drives on certain producing wells to assist in reducing future maintenance and power costs. Additional transportation, oil treatment and processing expenses were also incurred, as well as higher local office costs due to increased field activity.
2009 vs 2008
Operating costs on a per barrel basis, as well as in total, decreased in 2009 from the prior year due to lower field costs as well as a reduction in the Windfall Levy. Field operating costs in 2009 declined from 2008 as the result of decreased road and lease maintenance and workover costs, offset by higher oil treatment costs. Once key milestones in the Production Sharing Contract with CNPC were reached in September 2009, we incurred a smaller proportionate share of costs in 2009 and a decline in overall working interest. Had the Company paid a smaller proportionate share of costs in 2008 and the overall working interest had also been lower, field operating costs would have been $0.68/bbl lower in 2008. The Windfall Levy expense decreased in 2009 from the prior year since oil prices realized by the Company were lower in 2009.
General and Administrative
2010 vs 2009
General and administrative expenses (“G&A”) rose in 2010, primarily as a result of higher staff and office costs incurred with the Company’s growing commitments to its projects around the world. Staff and office costs increased $5.0 million in 2010 across all operating segments and corporate costs, such as stock exchange filing fees and non-cash stock-based compensation, increased by $1.8 million, which were offset by a decrease of $2.1 million in contract labour.
2009 vs 2008
In 2009, G&A rose in comparison to the prior period primarily as the result of higher costs in the corporate area and Ecuador. Corporate G&A rose $5.5 million in 2009 over 2008 due to incurring additional legal fees (see Item 3
ITEM 7A:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed in varying degrees to normal market risks inherent in the oil and gas industry, including commodity price risk, foreign currency exchange rate risk, credit risk and liquidity risk. We recognize these risks and manage our operations to minimize our exposures to the extent practicable.
COMMODITY PRICE RISK
Commodity price risk related to oil prices is one of Ivanhoe’s most significant market risk exposures. The Company’s operating results and financial condition are influenced by the prices we receive for our oil production. Oil prices may fluctuate widely in response to a variety of factors including global and domestic economic conditions, weather conditions, political stability, transportation facilities, the price and availability of alternative fuels and government regulations.
Based on our estimated 2011 production, a US$1.00/bbl change in the price of oil would increase or decrease net income and cash flows from operations for 2011 by US$0.82/bbl. In the past, we have used derivatives to minimize variability in our cash flow from operations when required to do so by loan covenants. However, no hedging contracts were in place in 2010 nor do we anticipate using hedging contracts in 2011 to manage our commodity price risk.
FOREIGN CURRENCY EXCHANGE RATE RISK
Ivanhoe is exposed to foreign currency exchange rate risk as a result of incurring capital expenditures and operating costs in currencies other than the US dollar. A substantial portion of our activities are transacted in or referenced to US dollars, including oil sales in Asia, capital spending in Ecuador and ongoing FTF operations. A portion of our transactions are in other currencies, such as Dagang operating costs paid in Chinese renminbi, Tamarack exploration activities funded in Cdn dollars and the 2010 common share issuance in Cdn dollars. The Company did not enter into any foreign currency derivatives in 2010, nor do we anticipate using foreign currency derivatives in 2011. To help reduce the Company’s exposure to foreign currency exchange rate risk, it seeks to hold assets and liabilities denominated in the same currency when appropriate.
The following table shows the Company’s exposure to foreign currency exchange rate risk on its net loss and comprehensive loss, assuming reasonably possible changes in the relevant foreign currency. This analysis assumes all other variables remain constant.
CREDIT RISK
Ivanhoe is exposed to credit risk with respect to its cash and cash equivalents, accounts receivable, note receivable, restricted cash and long term receivables. The Company’s maximum exposure to credit risk at December 31, 2010, is represented by the carrying amount of these non-derivative financial assets. Most of the Company’s credit exposures are with counterparties in the energy industry and are therefore exposed to normal industry credit risks. Ivanhoe manages its credit risk by only entering into sales contracts with established entities.
The Company believes its exposure to credit risk related to cash and cash equivalents, as well as restricted cash, is minimal due to the quality of the financial institutions where the funds are held and the nature of the deposit instruments.
Currently, all of the Company’s oil production is sold to one national oil corporation. As a result, 85% of the outstanding accounts receivable balance at December 31, 2010 (December 31, 2009 - 94%) is due from a national oil corporation. Long term value-added tax receivable from Ecuador will be recoverable upon commencement of commercial operations. Ivanhoe considers the risk of default on these items to be low due to the Company’s ongoing operations in China and Ecuador.
LIQUIDITY RISK
Liquidity risk is the risk that suitable sources of funding for the Company’s business activities may not be available. Since cash flows from existing operations are insufficient to fund future capital expenditures, we intend to finance future capital projects with a combination of strategic investors and/or public and private debt and equity markets, either at a parent company level or at the project level or from the sale of existing assets. There is no assurance that we will be able to obtain such financing on favorable terms, if at all.
NON-GAAP FINANCIAL MEASURES
Oil revenue per barrel is calculated by dividing oil revenue by the Company’s total production for the respective periods presented. Net operating revenue per barrel is calculated by dividing oil revenue less operating costs by total production for the respective periods presented. Net revenue (loss) from operations per barrel is calculated by subtracting depletion from net operating revenue and dividing by total production for the respective periods presented. The Company believes oil revenue per barrel, net operating revenue per barrel and net revenue (loss) from operations per barrel are important to investors to evaluate operating results and the Company’s ability to generate cash. Each of the components used in these calculations can be reconciled directly to the consolidated statement of loss and comprehensive loss. The calculations of oil revenue per barrel, net operating revenue per barrel and net revenue (loss) from operations per barrel may differ from similar calculations of other companies in the oil and gas industry, thereby limiting its usefulness as a comparative measure.
ITEM 8:
ITEM 8:
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Chartered Accountants
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Loss and Comprehensive Loss
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Supplementary Disclosures About Oil and Gas Production Activities (Unaudited)
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
To the Board of Directors and Shareholders of Ivanhoe Energy Inc.,
We have audited the accompanying consolidated financial statements of Ivanhoe Energy Inc. and subsidiaries, which comprise the consolidated balance sheets as at December 31, 2010 and 2009, and the consolidated statements of loss and comprehensive loss, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2010 and the notes to the consolidated financial statements.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Ivanhoe Energy Inc. and subsidiaries as at December 31, 2010 and 2009 and the results of their operations and cash flows for each of the years in the three-year period ended December 31, 2010 in accordance with Canadian generally accepted accounting principles.
Emphasis of Matter
Without qualifying our opinion, we draw attention to Note 2 in the financial statements which indicates that the Company had an accumulated deficit of $284.9 million and working capital of $16.5 million at December 31, 2010 and cash flow used in operating activities of $17.8 million and a net loss of $29.1 million during the year ended December 31, 2010. These conditions, along with other matters as set forth in Note 2, indicate the existence of a material uncertainty that may cast significant doubt about the Company’s ability to continue as a going concern.
Other Matter
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 4, 2011 expressed an unqualified opinion on the Company’s internal control over financial reporting.
IVANHOE ENERGY INC.
Consolidated Balance Sheets
December 31, 2010 and 2009
(See accompanying Notes to the Consolidated Financial Statements)
Approved on behalf of the Board:
(signed) “Robert M. Friedland”
Director
(signed) “Brian F. Downey”
Director
IVANHOE ENERGY INC.
Consolidated Statements of Loss and Comprehensive Loss
Three Years Ended December 31, 2010
(See accompanying Notes to the Consolidated Financial Statements)
IVANHOE ENERGY INC.
Consolidated Statements of Shareholders’ Equity
Three Years Ended December 31, 2010
(See accompanying Notes to the Consolidated Financial Statements)
IVANHOE ENERGY INC.
Consolidated Statements of Cash Flows
Three Years Ended December 31, 2010
(See accompanying Notes to the Consolidated Financial Statements)
IVANHOE ENERGY INC.
Notes to the Consolidated Financial Statements
(all tabular amounts are expressed US$000s, except share and per share amounts)
1. NATURE OF OPERATIONS
Ivanhoe Energy Inc. (the “Company” or “Ivanhoe”), a Canadian company, is an independent international heavy oil development and production company focused on pursuing long term growth in its reserves and production. Ivanhoe plans to utilize advanced technologies designed to significantly improve recovery of heavy oil resources, including its HTL™ technology. In addition, the Company seeks to expand its reserve base and production through conventional exploration and production of oil and gas. Our core operations are carried out in Canada, Ecuador, China and Mongolia.
2. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). The impact of material differences between Canadian and US GAAP on the consolidated financial statements is disclosed in Note 20.
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts and other disclosures in these consolidated financial statements. Actual results may differ from those estimates. In particular, the amounts recorded for depletion and depreciation of the oil and gas properties and accretion for asset retirement obligations are based on estimates of reserves and future costs. By their nature, these estimates, and those related to future cash flows used to assess impairment of oil and gas properties and development costs as well as intangible assets, are subject to measurement uncertainty and the impact on the financial statements of future periods could be material.
Going Concern and Basis of Presentation
These consolidated financial statements have been prepared in accordance with GAAP applicable to a going concern, which assumes that Ivanhoe will be able to meet its obligations and continue operations for at least its next fiscal year. Realization values may be substantially different from carrying values as shown and these consolidated financial statements do not give effect to adjustments that may be necessary to the carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern. Such adjustments could be material.
At December 31, 2010, Ivanhoe had an accumulated deficit of $284.9 million and working capital of $16.5 million. In 2010, cash used in operating activities was $17.8 million and the Company expects to incur further losses in the development of its business. Continuing as a going concern is dependent upon attaining future profitable operations to repay liabilities arising in the normal course of operations and accessing additional capital to develop the Company’s properties (refer to Notes 5 and 7). Ivanhoe intends to finance its future funding requirements through a combination of strategic investors and/or public and private debt and equity markets, either at a parent company level or at the project level. There is no assurance that Ivanhoe will be able to obtain such financing on favorable terms, if at all. Without access to additional financing in 2011, there is significant doubt that the Company will be able to continue as a going concern.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its subsidiaries and any variable interest entities. Any reference to the Company or Ivanhoe throughout these consolidated financial statements refers to Ivanhoe, its subsidiaries, and any variable interest entities. All inter-entity transactions have been eliminated. Ivanhoe conducts some of its oil production activities through jointly controlled operations and the consolidated financial statements reflect only Ivanhoe’s proportionate interest in such activities.
Foreign Currency Translation
The Company’s functional currency is the US dollar. All of Ivanhoe’s operations are considered integrated and are translated into US dollars using the temporal method. Under this method, monetary assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Non-monetary assets and liabilities, as well as operating transactions, are translated at the exchange rate prevailing at the time of the transaction. Translation exchange gains and losses are reflected in the results of operations.
Cash and Cash Equivalents
Cash and cash equivalents include short term investments, such as money market deposits or similar type instruments, with an original maturity of 90 days or less when purchased.
Full Cost Accounting for Oil and Gas Operations
The Company follows the full cost method of accounting for oil and gas operations whereby all exploration and development expenditures are capitalized on a country-by-country cost center basis. Such expenditures could include lease and royalty interest acquisitions, geological and geophysical expenses, carrying charges for unproved properties, costs of drilling both successful and unsuccessful wells, gathering and production facilities and equipment, major renovations, financing, asset retirement costs and administrative costs related to capital projects.
Proceeds from the sale of oil and gas properties are applied against capitalized costs, without any gain or loss being realized, unless such sale would significantly alter the rate of depletion and depreciation, in which case a gain or loss would be recognized.
Capitalized Interest
The Company capitalizes interest on major development projects until construction is complete. Capitalized interest cannot exceed the actual interest incurred.
Depletion and Depreciation
Provision for depletion of oil and gas assets is calculated using the unit-of-production method, based on proved reserves net of royalties as evaluated by independent petroleum engineers. The cost basis used for the depletion provision is the capitalized costs of oil and gas assets, including undeveloped property, plus the estimated future development costs of proved undeveloped reserves.
Furniture and equipment are depreciated on a straight line basis over the estimated useful life of the respective assets, at rates ranging from three to five years. The Feedstock Testing Facility (“FTF”) is being depreciated over its expected economic life of 20 years.
Impairment
The Company annually evaluates the carrying values of its oil and gas properties and development costs whenever events or conditions occur that indicate that the carrying values may not be recoverable from future cash flows. If the carrying values exceed the sum of estimated undiscounted future cash flows expected from proved reserves, the asset is impaired. The impairment charge is measured by assigning a fair value to the asset equal to its estimated discounted future net cash flows expected from proved plus probable reserves and the excess carrying value is expensed in the results of operations. The cost of unproved properties is excluded from the impairment test described above and subject to a separate impairment test. If impaired, the carrying value of the unproved properties is included in the petroleum and gas depletable base.
Cash flow estimates require assumptions about future commodity prices, ultimate recoverability of oil and gas reserves, operating costs and other factors. Actual results can differ materially from these estimates.
Intangible Assets
Intangible assets are recognized and measured at cost. Intangible assets with finite lives are amortized over their estimated useful life. Intangible assets are reviewed at least annually for impairment, or when events or changes in circumstances indicate that the carrying value of an intangible asset may not be recoverable. If the carrying value of an intangible asset exceeds its fair value or expected discounted future cash flows, the excess is expensed to the results of operations.
Asset Retirement Costs
The Company provides for future asset retirement obligations on its resource properties and facilities based on estimates established by current legislation and industry practices. The asset retirement obligation is initially measured at fair value and capitalized to the asset as an asset retirement cost that is depreciated over the life of the related asset. The obligation is accreted through interest expense until it is settled.
The fair value of the obligation is estimated by discounting expected future cash outflows to settle the asset retirement obligation using a credit-adjusted risk-free interest rate. Ivanhoe recognizes revisions to either the timing or the amount of the original estimate of undiscounted cash outflows as increases or decreases to the asset retirement obligation. Actual retirement costs are recorded against the obligation when incurred. Any difference between the recorded asset retirement obligations and the actual retirement costs incurred is recorded as a gain or loss in the settlement period.
Oil and Gas Revenue
Sales of oil and gas are recognized in the period in which the product is delivered to the customer. Oil and gas revenue represents the Company’s share and is recorded net of royalty payments to governments and other mineral interest owners.
In China, the Company conducts operations jointly with the government of China in accordance with a production sharing contract. Under this contract, the Company pays its share of operating costs and both its share and the government’s share of capital costs. The Company recovers the government’s share of the capital costs from future revenues over the life of the production sharing contract.
Income or Loss Per Common Share
Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share amounts are calculated based on net income divided by dilutive common shares. Dilutive common shares are arrived at by adding weighted average common shares to common shares issuable on conversion of options, using the treasury stock method. The treasury stock method assumes that proceeds received from the exercise of in-the-money options is used to repurchase common shares at the average market price. Dilution from the convertible debt is considered using the “if converted” method.
Income Taxes
Ivanhoe follows the liability method of accounting for future income taxes. Under the liability method, income tax assets and liabilities are recorded to reflect the expected future tax consequences of tax loss carry-forwards and temporary differences between the carrying value and the tax basis of the Company’s assets and liabilities. A valuation allowance is recorded if the future benefit of income tax assets, including unused tax losses, is not more likely than not to be ultimately realized. The effect of a change in tax rate on future income tax assets and liabilities is recognized in net income in the period in which the change is substantively enacted.
Stock-based Compensation
Options to purchase common shares are granted to directors, officers, employees and consultants at current market prices. The fair value of the options at the time of grant is recognized as a compensation expense in the results of operations over the vesting period of the option, with a corresponding increase to contributed surplus. Upon the exercise of the stock options, consideration paid together with the amount previously recognized in contributed surplus, is recorded as an increase in share capital. In the event that vested options expire unexercised, the previously recognized compensation expense associated with such stock options is not reversed. Forfeitures are estimated at the grant date and are subsequently adjusted to reflect actual forfeitures.
Financial Assets and Liabilities
Financial assets and financial liabilities are measured at fair value on initial recognition. Measurement in subsequent periods depends on whether the financial instrument has been classified as held-for-trading, loans and receivables, or other financial liabilities.
Financial assets and liabilities designated as held-for-trading are subsequently measured at fair value with changes in those fair values charged immediately to earnings. Ivanhoe classifies all derivative contracts as held-for trading. Cash and cash equivalents and restricted cash are classified as held-for-trading. Transaction costs are expensed as incurred.
Loans and receivables and other financial liabilities are subsequently measured at amortized cost using the effective interest method. Ivanhoe classifies accounts receivable and the note receivable as loans and receivables, and accounts payable, debt and the long term obligation as other financial liabilities. Transaction costs for other long term financial liabilities are deducted from the related liability and accounted for using the effective interest rate method.
Fair value measurements are classified according to the following hierarchy based on the amount of observable inputs used to value the instrument.
Level 1 -
Quoted prices are available in active markets. Active markets are those in which transactions occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 -
Pricing inputs are other than quoted prices in an active market included in Level 1. Prices in Level 2 are either directly or indirectly observable as of the reporting date. Level 2 valuations are based on inputs, including quoted forward prices for commodities, time value and volatility factors, which can be substantially observed or corroborated in the market place.
Level 3 -
Valuation at this level are those with inputs for the asset or liability that are not based on observable market data.
Assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement within the fair value hierarchy.
3. OIL AND GAS PROPERTIES AND DEVELOPMENT COSTS
Costs associated with unproved oil and gas properties that were not subject to depletion amounted to $190.8 million at December 31, 2010 (December 31, 2009 - $115.6 million). Costs subject to depletion included future capital expenditures of $7.3 million at December 31, 2010 (December 31, 2009 - $3.3 million) relating to the development of proved undeveloped reserves, as estimated by the Company’s independent reserve engineers.
In 2010, $7.0 million (2009 - $4.1 million; 2008 - $1.0 million) in general and administrative expenses related directly to exploration and development activities and interest of $2.5 million (2009 - $2.2 million; 2008 - $3.8 million) were capitalized.
The Company performed a ceiling test calculation at December 31, 2010, 2009 and 2008 to assess the recoverable value of its oil and gas properties. The present value of future net revenue from the Company’s proved reserves exceeded the carrying value of the Company’s oil and gas properties in 2010, 2009 and 2008, resulting in no impairment in each of those years. West Texas Intermediate prices used in calculating the expected future cash flows were based on the following benchmark prices adjusted for gravity, transportation and other factors as required by sales agreements as at December 31, 2010:
In 2009, Ivanhoe impaired $0.8 million of development costs associated with its HTL™ projects in Iraq and Libya. Gas-to-Liquids technology (“GTL”) development costs of $5.1 million and intangible GTL assets of $10.0 million were impaired in 2008.
When the Company’s FTF was placed into service, the Commercial Demonstration Facility was abandoned and the carrying value of $0.9 million was written down to nil in 2009.
4. INTANGIBLE ASSETS
The Company’s intangible assets consist of an exclusive, irrevocable license to deploy HTL™ technology, a master license permitting Ivanhoe to use the Syntroleum Process and the exclusive right to deploy the Rapid Thermal Processing process in all applications other than biomass. The carrying value of the HTL™ technology as at December 31, 2010 and 2009 was $92.2 million. This asset was not amortized and its carrying value was not impaired for the years ended December 31, 2010, 2009 and 2008.
5. DEBT
In connection with the acquisition of the Tamarack leases in July 2008 from Talisman Energy Canada (“Talisman”) (refer to Note 17), the Company issued a Cdn$40.0 million convertible promissory note (the “Convertible Note”) which matures in July 2011. Interest at the prime rate plus 2% is calculated daily and is payable semi-annually. The outstanding principal amount is convertible, at Talisman’s option, into a maximum of 12,779,552 Ivanhoe common shares at Cdn$3.13 per common share. The interest rate on the Convertible Note at December 31, 2010 was 5.00% (December 31, 2009 - 4.25%).
The Convertible Note is a compound financial instrument, containing a debt instrument as well as an embedded conversion feature classified as equity. The residual basis method was used to value the instrument. The fair value of the liability component was determined and the remaining value was assigned to the bifurcated equity component. The value of the liability was determined by discounting the expected interest and principal payments and was calculated at Cdn$37.9 million with the remaining value of Cdn$2.1 million allocated to the equity component. The liability component is accreted over the three year maturity period up to the Cdn$40.0 million principal amount using the effective interest rate method.
The Company’s obligations under the Convertible Note are secured by a first fixed charge and security interest in favor of Talisman against the acquired Talisman leases and the related assets acquired by the Company pursuant to the Talisman lease acquisition.
Interest expense included in the statement of operations was nil in 2010 (2009 - $0.8 million; 2008 - $1.2 million). In 2010, $2.5 million (2009 - $2.2 million; 2008 - $3.8 million) in interest was capitalized to oil and gas properties and development costs in the consolidated balance sheet.
6. ASSET RETIREMENT OBLIGATIONS
At December 31, 2010, the Company’s total estimated undiscounted inflated costs to settle its asset retirement obligations were approximately $1.9 million (December 31, 2009 - $0.9 million). These costs are expected to be incurred between 2013 and 2038 and have been discounted using an inflation rate specific to the country in which the costs will be incurred (2% to 4%) and a weighted average credit-adjusted risk-free rate of 5.2% (December 31, 2009 - 5.3%).
7. COMMITMENTS AND CONTINGENCIES
Long Term Obligation
As part of its 2005 merger with Ensyn Group Inc., the Company assumed an obligation to pay $1.9 million in the event that proceeds from the sale of units incorporating the HTL™ technology for petroleum applications reach a total of $100.0 million.
Income Taxes
The Company has an uncertain tax position in China related to when it is entitled to take tax deductions on capitalized development costs that are amortized over six years on a straight line basis. To the extent that there is a different interpretation in the timing of the deductibility of development costs, this could potentially result in an increase in the current tax expense of $0.9 million.
The Company has an uncertain tax position related to the calculation of a gain on the consideration received from two farm-out transactions. To the extent that the calculation of the gain is interpreted differently and the amounts are subject to withholding tax, there would be an additional current tax expense of approximately $0.7 million.
No amounts have been recorded in the consolidated financial statements related to the above mentioned uncertain tax positions as management has determined the likelihood of an unfavorable outcome to the Company to be low.
Lease Commitments
In 2010, the Company expended $2.6 million (2009 - $1.2 million; 2008 - $1.1 million) on operating leases relating to the rental of office space, which expire between January 2011 and September 2013. As at December 31, 2010, future net minimum payments for operating leases were the following:
Other
The Company may be required to make a Cdn$15.0 million cash payment to Talisman upon receiving government and other approvals necessary to develop the northern border of one of the Tamarack leases (refer to Note 17).
Occasionally, Ivanhoe enters into consulting agreements whereby a success fee may be payable if and when either a definitive agreement is signed or certain other contractual milestones are met. Under these agreements, the consultant may receive cash, common shares, stock options or some combination thereof.
From time to time, Ivanhoe is involved in litigation or has claims brought against it in the normal course of business. Management is currently not aware of any claims that would materially affect the reported financial position or results of operations.
8. SHAREHOLDERS’ EQUITY
The authorized capital of the Company consists of an unlimited number of common shares without par value and an unlimited number of preferred shares without par value.
The following reflects the changes in the Company’s common share purchase warrants for the three year period ended December 31, 2010.
(1)
One common share is issuable for each purchase warrant upon exercise.
(2)
Each common share purchase warrant originally entitled the holder to purchase one common share at a price of $2.63 per share until the fifth anniversary date of the closing. In September 2006, these warrants were listed on the Toronto Stock Exchange and the exercise price was changed to Cdn$2.93.
In January 2010, the Company completed a Cdn$125.0 million private placement (the “Private Placement”) consisting of 41,666,667 special warrants (“Special Warrants”) at Cdn$3.00. Each Special Warrant was converted into one common share of the Company and one-quarter of a common share purchase warrant. Each whole common share purchase warrant entitles the holder to acquire one common share of the Company at an exercise price of Cdn$3.16 on or before February 25, 2011 (refer to Note 19). The net proceeds from the Private Placement were approximately Cdn$120.2 million after deducting fees and commissions of Cdn$4.3 million and expenses of the Private Placement of approximately Cdn$0.5 million.
Under the terms of the Private Placement, an additional 8,333,333 Special Warrants issuable at Cdn$3.00 per Special Warrant were subject to an option, which were exercised in February 2010 for Cdn$25.0 million. The net proceeds realized by the Company from the issue of the Special Warrants were Cdn$23.8 million, after deducting fees and commissions payable of Cdn$1.1 million and expenses of Cdn$0.1 million. Each Special Warrant was converted into one common share and one-quarter of a common share purchase warrant following the issuance of a receipt for a prospectus by applicable Canadian securities regulatory authorities, which occurred on March 12, 2010.
The Company calculated the value of the common share purchase warrants using the Black Scholes option pricing model which included assumptions related to risk-free interest rates, volatility factors, and the expected life of the warrant. The value of the 10.4 million and 2.1 million purchase warrants issued in 2010 were calculated using a risk-free interest rate of 0.7% and 0.9% respectively, a volatility factor of 78.9% and 71.6% respectively and an expected life of one year.
In January 2010, one of the Company’s subsidiaries signed an agreement that granted a private investor an option to acquire a 20% interest in the subsidiary for Cdn$25.0 million. The option is valid for one year and does not become exercisable until the first quarter of 2011. The option was determined to have a nominal value at the grant date.
In 2009, 0.7 million purchase warrants were issued in exchange for outstanding warrants of a company that Ivanhoe acquired (refer to Note 17).
In July 2008, the Company completed a Cdn$88.0 million private placement consisting of 29,334,000 special warrants at Cdn$3.00 per special warrant (the “Offering”). Each of these special warrants entitled the holder to one common share of the Company upon exercise of the special warrant. In August 2008, all of these special warrants were exercised for 29,334,000 common shares. The net proceeds from the Offering were approximately Cdn$83.4 million after deducting the agents’ commission of Cdn$4.0 million and expenses of Cdn$0.6 million. The Company used Cdn$22.5 million of the net proceeds of the Offering to complete the cash component of the Talisman lease acquisition.
In April 2008, the Company obtained a loan from a third party finance company in the amount of Cdn$5.0 million bearing interest at 8% per annum. The principal and accrued and unpaid interest matured and was repayable in August 2008. In August 2008, the lender exercised its option to convert the entire outstanding balance into the Company’s common shares at a conversion price of Cdn$2.24 per share.
As the Company incurred a net loss for the years ended December 31, 2010, 2009 and 2008, the following potentially dilutive securities had an anti-dilutive effect on basic earnings per share:
9. STOCK-BASED COMPENSATION
The Company has an Employees’ and Directors’ Equity Incentive Plan under which it can grant stock options to directors and eligible employees to purchase common shares, issue common shares to directors and eligible employees for bonus awards and issue common shares under a share purchase plan for eligible employees. The total number of common shares that may be issued under this plan cannot exceed 7% of the Company’s issued and outstanding common shares which, at December 31, 2010, was 23.4 million (December 31, 2009 - 29.3 million). The maximum common share issuances under this plan was changed from a fixed number of common shares to a percentage of outstanding common shares in the second quarter of 2010.
Stock options are issued at the weighted average trading price for the five days immediately preceding the award and are conditional on continuing employment. Expiration and vesting periods are set at the discretion of the Board of Directors, but typically vest over three to four years and expire five to ten years from the date of issue. In 2007, the Company granted stock option awards that vest upon meeting various departmental and company-wide goals. At December 31, 2010, there were approximately 479,000 unvested options outstanding.
The following table summarizes changes in the Company’s outstanding stock options:
The following table summarizes information respecting stock options outstanding and exercisable as at December 31, 2010:
The fair value of each option award is estimated on the date of grant using the Black Scholes option pricing formula. Service condition options are amortized on a straight line attribution approach and performance condition options amortized over the service period, both with the following weighted average assumptions for the years presented:
The weighted average grant date fair value of stock options granted in 2010 was Cdn$1.73 (2009 - Cdn$1.62; 2008 - Cdn$0.90).
The Company’s stock-based compensation related to option awards, share bonus awards and common shares issued for services were classified as follows in the consolidated statement of loss:
Additionally, in 2010, $0.8 million (2009 - nil; 2008 - $0.2 million) of stock-based compensation was capitalized to oil and gas properties and development costs.
10. RETIREMENT PLAN
In 2001, the Company adopted a defined contribution retirement or thrift plan (“401(k) Plan”) to assist US employees in providing for retirement or other future financial needs. Employees’ contributions (up to the maximum allowed by US tax laws) were matched 100% by the Company in 2010. In 2010, the Company’s matching contributions to the 401(k) Plan were $0.4 million (2009 - $0.4 million; 2008 - $0.5 million).
11. SEGMENT INFORMATION
The Company subdivides its operations into four areas: Oil and Gas - Integrated, Oil and Gas - Conventional, Business and Technology Development and Corporate. Accounting policies for segments are the same as those described in Significant Accounting Policies (refer to Note 2).
Oil and Gas - Integrated
Projects in this segment have two primary components: conventional exploration and production activities supported by enhanced oil recovery techniques, such as steam assisted gravity drainage and deployment of the HTL™ technology. The Company has two projects currently reported in this segment: a heavy oil project in Canada and a heavy oil project in Ecuador.
Oil and Gas - Conventional
Projects in this segment consist of conventional oil and gas exploration and production activities without enhanced oil recovery techniques or the use of HTL™ technology. The Company has two conventional projects in Asia, located in China and Mongolia. Prior to July 2009, the Company conducted conventional exploration, development and production activities primarily in the US (refer to Note 18).
Business and Technology Development
The Company’s Business and Technology Development segment captures HTL™ activities as well as costs associated with the pursuit of new business development opportunities.
Corporate
The Corporate area tracks costs associated with the board of directors, executive officers, corporate debt, financings and other corporate activities.
(1)
The Company sold its US operations in the third quarter of 2009.
(2)
Corporate activities undertaken on behalf of a segment are allocated to that segment at cost.
(3)
All revenues in Asia are generated from the sale of production to one customer.
(1)
The Company sold its US operations in the third quarter of 2009.
(2)
Corporate activities undertaken on behalf of a segment are allocated to that segment at cost.
(3)
All revenues in Asia are generated from the sale of production to one customer.
(1)
The Company sold its US operations in the third quarter of 2009.
(2)
Corporate activities undertaken on behalf of a segment are allocated to that segment at cost.
(3)
All revenues in Asia are generated from the sale of production to one customer.
12. FINANCIAL INSTRUMENTS
The Company’s financial instruments are comprised of cash and cash equivalents, accounts receivable, note receivable, restricted cash, long term receivables, accounts payable and accrued liabilities, debt and a long term obligation.
The Company’s cash and restricted cash are transacted in active markets and have been classified using Level 1 inputs.
Carrying amounts of financial instruments approximate their fair value except for debt. The Company calculated the fair value of its debt to be $40.2 million as at December 31, 2010.
Financial Risk Factors
In the normal course of operations, the Company is exposed to market risks resulting from movements in commodity prices, foreign currency exchange rates and interest rates, which may result in fluctuations in the fair value or future cash flows of its financial instruments.
Commodity Price Risks
Commodity price risk refers to the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to the changes in market commodity prices. Oil prices and quality differentials are influenced by worldwide factors such as OPEC actions, political events and supply and demand fundamentals. The Company may periodically use different types of derivative instruments to manage its exposure to price volatility.
In 2007, the Company entered into a costless collar derivative to minimize variability in its cash flow from the sale of up to 18,000 bbls/month of the Company’s production from its Dagang field in China over a three year period. This derivative had a ceiling price of $84.50 /bbl and a floor price of $55.00 /bbl using the WTI as the index traded on the NYMEX. The contracts related to this derivative were put in place as part of the Company’s bank loan facility and consequently all remaining contracts were settled when this loan was repaid in December 2009.
Results of these derivative transactions for the three years ended December 31, 2010, are:
Foreign Currency Exchange Rate Risk
Ivanhoe is exposed to foreign currency exchange rate risk as a result of incurring capital expenditures and operating costs in currencies other than the US dollar. A substantial portion of the Company’s activities are transacted in or referenced to US dollars, including oil sales in Asia, capital spending in Ecuador and ongoing FTF operations. A portion of transactions are in other currencies, such as Dagang operating costs paid in Chinese renminbi, Tamarack exploration activities funded in Canadian dollars and the 2010 common share issuance in Canadian dollars. The Company did not enter into any foreign currency derivatives in 2010, nor do we anticipate using foreign currency derivatives in 2011. To help reduce the Company’s exposure to foreign currency exchange rate risk, the Company seeks to hold assets and liabilities denominated in the same currency when appropriate.
The following table shows the Company’s exposure to foreign currency exchange rate risk on its net loss and comprehensive loss, assuming reasonably possible changes in the relevant foreign currency. This analysis assumes all other variables remain constant.
Interest Rate Risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of changes in market interest rates. Interest rate risk arises from interest-bearing borrowings which have a variable interest rate. The Company’s net loss and accumulated deficit would not have changed with a change in interest rates in 2010 as the Company’s debt consists of the Convertible Note issued for the acquisition of the Tamarack leases for which interest is capitalized.
Credit Risk
Ivanhoe is exposed to credit risk with respect to its cash and cash equivalents, accounts receivable, note receivable, restricted cash and long term receivables. The Company’s maximum exposure to credit risk at December 31, 2010, is represented by the carrying amount of these non-derivative financial assets. Most of the Company’s credit exposures are with counterparties in the energy industry and are therefore exposed to normal industry credit risks. Ivanhoe manages its credit risk by entering into sales contracts only with established entities.
The Company believes its exposure to credit risk related to cash and cash equivalents, as well as restricted cash, is minimal due to the quality of the financial institutions where the funds are held and the nature of the deposit instruments.
Currently, all of the Company’s oil production is sold to one national oil corporation. As a result, 85% of the outstanding accounts receivable balance at December 31, 2010 (December 31, 2009 - 94%) is due from a national oil corporation. Long term receivables are composed of value-added tax receivable amounts from Ecuador and will be recoverable upon commencement of commercial operations. Ivanhoe considers the risk of default on these items to be low due to the Company’s ongoing operations in China and Ecuador.
In 2008, the Company recorded an allowance associated with an advance balance for the outstanding amount of $0.7 million.
Liquidity Risk
Liquidity risk is the risk that suitable sources of funding for the Company’s business activities may not be available. Since cash flows from existing operations are insufficient to fund future capital expenditures, we intend to finance future capital projects with a combination of strategic investors and/or public and private debt and equity markets, either at a parent company level or at the project level or from the sale of existing assets. There is no assurance that we will be able to obtain such financing on favorable terms, if at all.
13. CAPITAL MANAGEMENT
The Company’s main source of funds has historically been public and private equity and debt markets. The Company’s cash flow from operating activities will not be sufficient to meet its operating and capital obligations and, as such, the Company intends to finance its operating and capital projects from a combination of strategic investors in its projects and/or public and private debt and equity markets, either at a parent company level or at a project level. There have been no significant changes in Management’s objectives, policies and processes to manage capital from the previous year.
The Company defines capital as total shareholders’ equity plus cash and cash equivalents and debt.
The Company’s management reviews the capital structure on a regular basis to maintain an optimal debt to equity balance. In order to maintain or adjust its capital structure, the Company may refinance its existing debt, raise new debt, seek cost sharing arrangements with partners or issue new shares.
In 2008, the Company expensed $2.6 million of deferred financing costs that were directly attributable to a proposed offering of securities for its wholly-owned Chinese subsidiary.
As at December 31, 2010, the Company is not subject to any financial covenants.
14. INCOME TAXES
The Company and its subsidiaries are required to individually file tax returns in each of the jurisdictions in which they operate. The provision for income taxes differs from the amount computed by applying the statutory income tax rates to the net losses before income taxes. The combined Canadian federal and provincial statutory rates as at December 31, 2010, 2009 and 2008 were 28.0%, 29.0% and 29.5%, respectively. The sources and tax effects for the differences were as follows:
Significant components of the Company’s future net income tax assets and liabilities were as follows:
The consolidated loss carry-forward amounts and the year of expiry as at December 31, 2010, are shown in the table below. In China, the loss carry-forwards have no expiration period. A loss of approximately Cdn$55.3 million from the disposition of Russian operations in 2000, is a capital loss for Canadian income tax purposes, and is available for carry-forward against future Canadian capital gains indefinitely and is not included in the future income tax assets above.
There are no current income taxes payable at December 31, 2010 (December 31, 2009 - $0.2 million related to China, $0.3 million related to the US).
Prior to the Company selling its US operating segment in July 2009, the Company had future tax assets arising from net operating loss carry-forwards generated by this business segment. These future income tax assets were partially offset by certain future income tax liabilities in the US and by a valuation allowance. As at June 30, 2009, as a result of the sale of the business segment, the Company was no longer able to offset these tax assets and liabilities but was required to present these future income tax assets as “assets from discontinued operations” and a future income tax liability, both in the amount of $29.6 million in the accompanying consolidated balance sheet. The future income tax assets classified as assets from discontinued operations were included in the $23.4 million loss on disposition. Revisions were made to the future income tax liability during the third quarter of 2009 based on revised projections of taxable income and utilization of net operating loss carry-forwards.
As at December 31, 2010, the Company’s future income tax liability is $21.5 million in the accompanying consolidated balance sheet, composed of $18.8 million in the US tax jurisdiction and $2.7 million related to Mongolia.
In April 2009, the Chinese State Tax Administration Bureau issued Circular [2009] No. 49 (the “Circular”) on depletion, depreciation and amortization expense by oil and gas companies. One of the changes to the existing rules included in the Circular that affects the Company was the increase of the minimum depreciation and amortization period from six years to eight years. The implementation of the new rules was retroactive to January 1, 2008. Upon reviewing the tax effect of the Circular, the Company revised its 2008 current tax payable in China to $1.6 million from the $0.6 million that was recorded in 2008. The $1.6 million tax payable was subsequently paid in June 2009.
15. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for each of the years ended December 31 was as follows:
Cash and cash equivalents are composed of the following:
16. RELATED PARTY TRANSACTIONS
The Company has entered into agreements with a number of entities which are related or controlled through common directors or shareholders. These entities provide access to an aircraft, the services of administrative and technical personnel and office space or facilities in various international locations. The Company is billed on a cost recovery basis
in most cases. In 2010, the costs incurred in the normal course of business with respect to the above arrangements amounted to $3.3 million (2009 - $3.8 million; 2008 - $3.0 million). These transactions have been measured at their exchange amount and are recorded in general and administrative and business and technology expense in the statement of operations. As at December 31, 2010, amounts included in accounts payable and accrued liabilities on the consolidated balance sheet under these arrangements were $0.2 million (December 31, 2009 - $0.1 million).
17. ACQUISITION AND PROJECT-RELATED AGREEMENTS
Mongolia
In November 2009, the Company completed the acquisition of PanAsian Petroleum Inc. (“PPI”) which provides it with the exclusive right to explore, develop and produce oil or gas within Block XVI in Mongolia’s Nyalga Basin. This transaction with PPI resulted in the Company issuing 2,683,291 common shares in exchange for all of the issued and outstanding common shares of PPI. In addition, existing purchase warrants in PPI were converted to 735,449 Ivanhoe purchase warrants that entitle the holders to purchase Ivanhoe’s common shares at Cdn$4.05 per share and expire in February 2011.
The consideration for this acquisition and the net assets acquired are summarized as follows:
Canada
In July 2008, the Company acquired from Talisman two leases located in the Athabasca oil sands region in the Province of Alberta, Canada. The amount paid was Cdn$75.0 million of which Cdn$22.5 million was paid on closing and two promissory notes were issued to Talisman. The principal amount of the first note was Cdn$12.5 million with an interest rate of prime plus 2%. The first note matured and was repaid on December 31, 2008. The second promissory note was Cdn$40.0 million, with an interest rate of prime plus 2%. The second note matures in July 2011 and the outstanding principal amount is convertible at Talisman’s option into a maximum of 12,779,552 Ivanhoe common shares at Cdn$3.13 per common share.
The Company may be required to make a Cdn$15.0 million cash payment to Talisman upon receiving government and other approvals necessary to develop the northern border of one of the Tamarack leases.
Talisman retains a back-in right (the “Back-in Right”), exercisable once per lease until July 11, 2011, to re-acquire up to a 20% undivided interest in each lease. If the Back-in Right is exercised, the cost to Talisman would be 20% of 200% of Ivanhoe’s acquisition cost and certain expenses incurred since acquisition in respect of the relevant lease.
Until July 11, 2011, Talisman also has the right of first offer to acquire any interests in heavy oil projects in the Province of Alberta that the Company or any of its subsidiaries wishes to sell, excluding the acquired leases.
Ecuador
In October 2008, Ivanhoe Energy Ecuador Inc. (“IE Ecuador”) entered into a contract with Empresa Estatal de Petroleos del Ecuador, Petro (“Petroecuador”), the state oil company of Ecuador, and its affiliate, Empresa Estatal de Exploracion y Produccion de Petroleos del Ecuador, Petroproduccion (“Petroproduccion”) to explore and develop an exploration block in Ecuador that includes the Pungarayacu heavy oil field, utilizing the Company’s HTL™ technology. IE Ecuador is a wholly-owned subsidiary of Ivanhoe Energy Latin America Inc. (“IE Latin America”), a wholly-owned subsidiary of the Company.
IE Ecuador will lead the development of the project. The contract is guaranteed by its parent company IE Latin America, which will obtain or provide funding and financing for IE Ecuador’s operations under the contract. The contract’s 30 year term may be extended by mutual agreement. To recover its investments, costs and expenses, and to provide for a profit, IE Ecuador will receive from Petroproduccion a payment of US$37.00/bbl of oil produced and delivered to Petroproduccion. The payment will be adjusted quarterly, on a weighted average basis, for movement in a basket of three US Government published producer price indices relating to steel products, refinery products and upstream oil and gas equipment.
18. DISCONTINUED OPERATIONS
In 2009, management commenced a process to sell all of the Company’s US oil and gas exploration and production operations. On July 17, 2009, the Company completed the sale of its wholly-owned subsidiary Ivanhoe Energy (USA) Inc. for a purchase price of $39.2 million. The purchaser acquired the Company’s oil and gas exploration and production operations in California and Texas and additional exploration acreage in California.
The Company used approximately $5.2 million of the sales proceeds to repay an outstanding loan to a third party financial institution holding a security interest in Ivanhoe Energy (USA) Inc.’s assets. The Company applied the balance of the sales proceeds in the ongoing development of its heavy oil projects in Canada and Ecuador and for general corporate purposes.
An escrow deposit of $2.0 million was set aside from the sale proceeds and made available to the purchaser for a period of one year to satisfy any indemnification obligations of the Company. In July 2010, the purchaser notified the Company of a claim against the entire escrow deposit for alleged breaches of certain covenants in the purchase and sale agreement in respect of tax matters. While the Company believed there was no basis for the claim, in the fourth quarter of 2010, Ivanhoe agreed to pay the purchaser $250,000 of the escrow deposit to avoid a lengthy legal dispute and the remaining $1.75 million was returned to Ivanhoe.
In conjunction with the disposition of the US assets and the Company’s focus on heavy oil opportunities, the Company closed its support office in Bakersfield, California and transferred its accounting operations to Calgary, Alberta. This transition was completed by the end of the second quarter of 2010. Total costs associated with this closure, including severance and retention payments, were approximately $0.6 million.
The operating results for this discontinued operation for the periods noted were:
19. SUBSEQUENT EVENTS
On January 24, 2011, the Company announced its application to extend the expiry date of 12,410,000 unlisted outstanding common share purchase warrants had been approved by the Toronto Stock Exchange. The extension excluded 90,000 warrants held by an insider. These warrants were scheduled to expire on January 26, 2011 and instead expired on February 25, 2011. The Company received proceeds of $27.2 million from the exercise of 8,616,665 out of the 12,320,000 common share purchase warrants. These proceeds will be used for general corporate purposes.
20. ADDITIONAL DISCLOSURES REQUIRED UNDER US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The Company’s consolidated financial statements have been prepared in accordance with GAAP as applied in Canada. In the case of the Company, Canadian GAAP conforms in all material respects with US GAAP except for certain matters, the details of which are as follows:
Consolidated Balance Sheets
The application of US GAAP has the following effects on consolidated balance sheet items as reported under Canadian GAAP:
Oil and Gas Properties and Development Costs
(i)
There are certain differences between the full cost method of accounting for oil and gas properties as applied in Canada and as applied in the US. The principal difference is in the method of performing ceiling test evaluations. In the ceiling test evaluation for US GAAP purposes, the Company limits, on a country-by-country basis, the capitalized costs of oil and gas properties, net of accumulated depletion, depreciation and amortization and deferred income taxes, to (a) the present value of estimated future net revenues computed by applying a 12 month average oil price to reserves to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves computed using a discount factor of 10% and assuming continuation of existing economic conditions; plus (b) the cost of properties not being amortized (e.g. major development projects) and (c) the lower of cost or fair value of unproved properties included in the costs being amortized less (d) income tax effects related to the difference between the book and tax basis of the properties referred to in (b) and (c) above. If capitalized costs exceed this limit, the excess is charged as a provision for impairment. Unproved properties and major development projects are assessed on a quarterly basis for possible impairments or reductions in value. If a reduction in value has occurred, the impairment is transferred to the carrying value of proved oil and gas properties. The Company performed the ceiling test in accordance with US GAAP and determined that for the year ended December 31, 2010, no impairment provision was required. The cumulative differences in the amount of impairment provisions between US and Canadian GAAP were $38.5 million at December 31, 2010, and December 31, 2009.
(ii)
The cumulative differences in the amount of impairment provisions between US and Canadian GAAP resulted in reductions in accumulated depletion.
(iii)
Under Canadian GAAP, the Company was required to bifurcate the value of the Convertible Note, allocating a portion to debt and a portion to equity. Under US GAAP, convertible debt securities are classified as debt in their entirety. Under Canadian GAAP, this discount accretion was capitalized. To reconcile to US GAAP the entire $2.1 million recorded in equity is reversed as well as the unamortized discount of $0.4 million and the accreted discount that was capitalized in the amount of $1.6 million. In addition, because the convertible note is not denominated in US currency the re-measurement of the different carrying value for US GAAP results in an increase to net income. The foreign exchange gain of $0.1 million is shown as a separate amount in the US GAAP reconciliation of the Company’s balance sheet shown above and is adjusted to the foreign exchange expense line item in the US GAAP reconciliation of the statement of operations below.
Shareholders’ Equity
(iv)
In June 1999, the shareholders approved a reduction of stated capital in respect of the common shares by an amount of $74.5 million being equal to the accumulated deficit as at December 31, 1998. Under US GAAP, a reduction of the accumulated deficit such as this is not recognized except in the case of a quasi reorganization.
(v)
Under Canadian GAAP, the Company accounts for all stock options granted to employees and directors since January 1, 2002 using the fair value based method of accounting. Under this method, compensation costs are recognized in the financial statements over the stock options’ vesting period using an option-pricing model for determining the fair value of the stock options at the grant date. Under US GAAP, prior to January 1, 2006, the Company applied Accounting Principles Board (“APB”) Opinion No. 25, as interpreted by Financial Accounting Standards Board (“FASB”) Interpretation No. 44, in accounting for its stock option plan and did not recognize compensation costs in its financial statements for stock options issued to employees and directors. Beginning January 1, 2006, the Company applied the revision to FASB’s Accounting Standards Codification Manual (“ASC”) Topic 718 “Stock Compensation” (formerly Statement of Financial Accounting Standards (“SFAS”) No. 123R) which supersedes APB No. 25, “Accounting for Stock Issued to Employees”. The Company elected to implement this statement on a modified prospective basis whereby the Company began recognizing stock-based compensation in its US GAAP results of operations for the unvested portion of awards outstanding as at January 1, 2006 and for all awards granted after January 1, 2006. There are no significant differences between the accounting for stock options under Canadian GAAP and US GAAP subsequent to January 1, 2006.
(vi)
The Company accounts for purchase warrants as equity under Canadian GAAP. The accounting treatment of warrants under US GAAP reflects the application of ASC Topic 815 “Derivatives and Hedging” (formerly SFAS No. 133). Under ASC Topic 815, share purchase warrants with an exercise price denominated in a currency other than a company’s functional currency are accounted for as derivative liabilities. Changes in the fair value of the warrants are required to be recognized in the statement of operations each reporting period for US GAAP purposes. At the time that the Company’s share purchase warrants are exercised, the value of the warrants will be reclassified to shareholders’ equity for US GAAP purposes. Under Canadian GAAP, the fair value of the warrants on the issue date is recorded as a reduction to the proceeds from the issuance of common shares, with the offset to the warrant component of equity. The warrants are not revalued to fair value under Canadian GAAP.
(vii)
Under US GAAP, the aggregate value attributed to the acquisition of royalty rights during 1999 and 2000 was $1.4 million higher, due to the difference between Canadian and US GAAP in the value ascribed to the common shares issued, primarily resulting from differences in the recognition of effective dates of the transactions.
Consolidated Statements of Loss and Comprehensive Loss
The application of US GAAP had the following effects on net loss and net loss per share as reported under Canadian GAAP:
Development Costs
(viii)
For Canadian GAAP, feasibility, marketing and related costs incurred prior to executing a HTL™ or GTL definitive agreement are capitalized and are subsequently written down upon determination that a project’s future value has been impaired. The Company wrote off $5.1 million in GTL development costs under Canadian GAAP. These costs had already been expensed under US GAAP in previous periods and therefore this transaction reduced the net loss for US GAAP purposes in 2008.
Depletion and Depreciation
(ix)
As discussed under “Oil and Gas Properties and Development Costs” in this note, there is a difference between US and Canadian GAAP in performing the ceiling test evaluation under the full cost method. Application of the ceiling test evaluation under US GAAP has resulted in an accumulated net increase in impairment provisions on the Company’s US and China oil and gas properties. This net increase in US GAAP impairment provisions has resulted in lower depletion rates for US GAAP purposes and a reduction in the net losses for the years ended December 31, 2010, 2009 and 2008.
Discontinued Operations
(x)
As at December 31, 2009, the $24.9 million adjustment related to discontinued operations included a $1.4 million increase that is attributed to the acquisition of royalty rights during 2000 and 1999 due to the difference between Canadian and US GAAP in the value ascribed to the common shares issued, primarily resulting from differences in the recognition of effective dates of the transactions. Additionally, there was a $3.1 million increase due to depletion. These increases were offset by $29.4 million decrease due to impairment differences. These accumulated balance sheet adjustments were charged off as part of the gain/loss calculation at the time of sale and flow through the statement of operations for the year ended December 31, 2009 in the Net Loss from Discontinued Operations line item.
Consolidated Statements of Cash Flows
As a result of the expensing of HTL™ and GTL development costs as required under US GAAP and the recovery of such costs, the statement of cash flow under US GAAP would result in a net use of cash from operating activities of $17.8 million, $12.4 million and cash provided from operating activities of $16.6 million for the year ended December 31, 2010, 2009 and 2008, respectively. Additionally, capital investments reported under investing activities would be $86.3 million, $26.2 million and $20.7 million for the years ended December 31, 2010, 2009 and 2008, respectively.
Additional US GAAP Disclosures
Oil and Gas Properties and Development Costs
The categories of costs included in “Oil and Gas Properties and Development Costs”, including the US GAAP adjustments were as follows:
As at December 31, 2010, the costs of unproved properties included in oil and gas properties and development costs, which have been excluded from the depletion and ceiling test calculations, were incurred as follows:
As at December 31, 2010, the costs of unproved oil and gas by prospect were incurred as follows:
Accounts Payable and Accrued Liabilities
The following was the breakdown of accounts payable and accrued liabilities as at December 31, 2010:
Stock-based Compensation
The aggregate intrinsic value of total options outstanding as well as options exercisable as at December 31, 2010 was $8.1 million and $3.8 million respectively. The total intrinsic value of options exercised during the year ended December 31, 2010 was $2.3 million (2009 - $3.0 million; 2008 - $5.4 million), and the cash received from exercise of options during the year ended December 31, 2010 was $2.6 million (2009 - $0.9 million; 2008 - $0.2 million).
A summary of the Company’s unvested options as at December 31, 2010, and changes during the year then ended, is presented below:
Unvested options outstanding as at December 31, 2010, by type:
As at December 31, 2010, there was $10.0 million of total unrecognized compensation costs related to unvested share-based compensation arrangements granted by the Company. That cost is expected to be recognized over a weighted-average period of 3.0 years. The total fair value of options vested during the year ended December 31, 2010 was $4.7 million (2009 - $2.2 million; 2008 - $3.0 million).
Impact of New and Pending US GAAP Accounting Standards
There were no changes in accounting standards in 2010 that affected or are expected to affect the Company. As a foreign private issuer in the US, Ivanhoe is permitted to file with the SEC consolidated financial statements prepared under IFRS beginning in 2011 without a reconciliation to US GAAP. The impact of this change is that the Company will no longer prepare a reconciliation of its results to US GAAP. It is possible that some of the Company’s accounting policies under IFRS could be different from US GAAP.
SUPPLEMENTARY DISCLOSURES ABOUT OIL AND GAS PRODUCTION ACTIVITIES
(Unaudited)
(all tabular amounts are expressed in US$000s, except reserves and depletion rate amounts)
The following information about the Company’s oil and gas producing activities is presented in accordance with Accounting Standards Codification 932 Extractive Activities - Oil and Gas (section 235-55) formerly US SFAS No. 69, “Disclosures About Oil and Gas Producing Activities”.
Oil and Gas Reserves
Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations.
Proved developed oil and gas reserves are proved reserves that can be expected to be recovered: (i) through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well; and (ii) through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.
Estimates of oil and gas reserves are subject to uncertainty and will change as additional information regarding the producing fields and technology becomes available and as future economic conditions change.
Reserves presented in this section represent the Company’s share of reserves, excluding royalty interests of others. The reserves were based on the estimates by the independent petroleum engineering firm of GLJ Petroleum Consultants Ltd. The changes in the Company’s net proved oil reserves in China for the three-year period ended December 31, 2010, were as follows:
(1)
The oil reserve revision is due to better performance of the Dagang property in relation to the 2007 reserve report.
(2)
The oil reserve revision is due to improved production and fracture performance of the Dagang property in relation to what was estimated in the 2008 reserve report.
(3)
The reserve revision in 2010 is mainly related to lower estimated decline rates on the Dagang property based on production to date.
Net proved producing reserves in China as at December 31, were as follows:
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Gas Reserves
For the year ended December 31, 2010 and 2009, future net cash flows were computed using 12 month historical average prices in estimating the Company’s proved oil reserves, current costs, and statutory tax rates adjusted for tax deductions, that relate to existing proved oil reserves. For the year ended December 31, 2008, future net cash flows were computed using year-end prices, year-end costs, and statutory tax rates. The following standardized measure of discounted future net cash flows from proved oil reserves was computed using prices of $76.35, $58.00 and $41.57 /bbl of oil in 2010, 2009 and 2008, respectively. A discount rate of 10% was applied in determining the standardized measure of discounted future net cash flows.
The Company does not believe that this information reflects the fair market value of its oil and gas properties. Actual future net cash flows will differ from the presented estimated future net cash flows in that:
•
future production from proved reserves will differ from estimated production;
•
future production may also include production from probable and possible reserves;
•
future, rather than average annual, prices and costs will apply; and
•
existing economic, operating and regulatory conditions are subject to change.
The standardized measure of discounted future net cash flows for China as at December 31 in each of the three most recently completed financial years were as follows:
Note: The Company is using current costs in the preparation of the information shown in the tables above and to determine proved reserves. However, future production costs may not be easily comparable to historical production costs. The two main causes of difficulty in analyzing future production costs when compared to historical spending are summarized as follows:
Changes in standardized measure of discounted future net cash flows from China as at December 31 in each of the three most recently completed financial years were as follows:
Costs incurred in oil and gas property acquisition, exploration, and development activities for the Company’s oil and gas properties were as follows:
The US GAAP depletion rates, on a net production basis, were as follows:
The results of operations from producing activities for the years ended December 31 were as follows:
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A:
ITEM 9A:
CONTROLS AND PROCEDURES
The Company’s management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2010. Based upon this evaluation, management concluded that these controls and procedures were (1) designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is accumulated and communicated to the Company’s Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure and (2) effective in accomplishing those objectives, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with Canadian generally accepted accounting principles and includes those policies and procedures that:
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•
provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with Canadian generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on our assessment, management has concluded that, as of December 31, 2010, the Company’s internal control over financial reporting was effective based on those criteria. Management has reviewed the results of its assessment with the Audit Committee of the Board of Directors. Deloitte & Touche LLP, the Company’s independent registered Chartered Accountants that audited the financial statements included in Item 8 of this Form 10-K, has also audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, as stated in their report which immediately follows.
/s/ Robert M. Friedland
/s/ Gerald D. Schiefelbein
Robert M. Friedland
Gerald D. Schiefelbein
Chief Executive Officer
Chief Financial Officer
March 4, 2011
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
To the Board of Directors and Shareholders of Ivanhoe Energy Inc.
We have audited the internal control over financial reporting of Ivanhoe Energy Inc. and subsidiaries (the “Company”) as of December 31, 2010, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2010 of the Company and our report dated March 4, 2011 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Independent Registered Chartered Accountants
Calgary, Canada
March 4, 2011
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in the Company’s internal control over financial reporting that occurred during the 12 months ended December 31, 2010, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART III
ITEM 10:
ITEM 10:
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Each director is elected for a one-year term or until his successor has been duly elected or appointed. All of our directors were elected at our last annual general meeting of shareholders (“AGM”) held on April 28, 2010. The term of office of each director concludes at our next AGM, unless the director’s office is earlier vacated in accordance with our by-laws.
Officers serve at the pleasure of the Board of Directors.
A. ROBERT ABBOUD
Mr. Abboud has been Co-Chairman and Independent Lead Director of the Company since May 2006 and serves as a member of the Company’s Audit, Nominating and Corporate Governance and Executive Committees. Mr. Abboud has been President and Chief Executive Officer of A. Robert Abboud and Company, a private investment company, since 1984, and has had a 46-year career in oil and gas, banking and foreign affairs. He was previously President and Chief Operating Officer of Occidental Petroleum Corporation, Chairman and Chief Executive Officer of First Chicago Corporation and The First National Bank of Chicago, Chairman and Chief Executive Officer of First City Bancorporation of Texas, Chairman of ACB International, Ltd., a joint venture that included the Bank of China and a subsidiary of the Chinese Ministry of Foreign Relations and Trade. Mr. Abboud has served as a member of the Board of Directors of AMOCO and as Audit Committee Chairman for AAR Corporation, Alberto-Culver Company, Hartmarx Corporation, ICN Pharmaceuticals Inc. and Inland Steel Industries. Mr. Abboud holds a Bachelor of Arts (Cum Laude) from Harvard College, a J.D. from Harvard Law School and a Master of Business Administration from Harvard Business School, and is a member of the Illinois and Massachusetts Bar Associations, as well as the Federal Bar and American Bar Associations. Mr. Abboud was selected to serve on our Board due to his extensive experience at the senior executive and board level in the oil and gas industry and in international finance, and for the financial acumen, strategic insight, acute business judgment and international business experience he brings to the Company.
ROBERT M. FRIEDLAND
Mr. Friedland has been Executive Co-Chairman and Chief Executive Officer of the Company since May 2008. A co-founder of the Company, Mr. Friedland has been a director since February 1995, Deputy Chairman of the Company from June 1999 to May 2008 and President of the Company from May 2008 to May 2010. Mr. Friedland has been the Chair of the Company’s Executive Committee since its formation in October 2008. Mr. Friedland has also been Executive Chairman of Ivanhoe Mines Ltd., a Canadian public company with extensive operating, development and exploration interests in the Asia Pacific region since 1994 and was appointed as Chief Executive Officer in October 2010. Mr. Friedland is Chairman (since 1991) and President (since 1988) of Ivanhoe Capital Corporation, a private company based in Singapore that specializes in providing venture capital and project financing for international business enterprises, predominantly in the fields of energy and minerals. He has also been Chairman since 2000, and was President from 2003-2008, of Ivanhoe Nickel & Platinum Ltd., and was Chairman of Potash One Inc., a Canadian public company, from May 2009 to January 2011. Mr. Friedland brings many valuable attributes to our Board, including his extensive experience in international corporate finance and as a senior executive and director of several internationally-focused natural resource companies and his proven track record in overseeing the exploration for, and discovery of, major resource deposits in Canada, Mongolia and elsewhere.
HOWARD R. BALLOCH
Mr. Balloch has been a director of the Company since January 2002. Mr. Balloch is the Chair of both the Nominating and Corporate Governance and Compensation and Benefits Committees, and is a member of the Executive Committee. He is Chairman of Canaccord Genuity Asia, following the acquisition by Canaccord Financial Inc. of The Balloch Group, the investment advisory firm he founded in 2001. A veteran Canadian diplomat, Mr. Balloch began serving as Canada’s ambassador to the People’s Republic of China, Mongolia and the Democratic People’s Republic of Korea in 1996 after a 20-year career in the Government of Canada’s Department of Foreign Affairs and International Trade and Privy Council Office. Mr. Balloch is Vice Chairman of the Canada China Business Council, having served as its President between 2001 and 2006. Mr. Balloch holds a Bachelor of Arts (Honours) degree in Political Science and Economics and a Master of Arts in International Relations from McGill University, and completed Ph.D. studies at the University of Toronto and at Fondation Nationale de Sciences Politiques, Paris. Mr. Balloch was selected to serve as a director on our Board based on his experience as a Canadian diplomat and as an international businessman, his extensive knowledge of foreign affairs and the political and regulatory environment in many of the key regions in which the Company operates, including China, and his knowledge and experience in matters of public company governance.
CARLOS A. CABRERA
Mr. Cabrera has been a director of the Company since May 2010 and serves as a member of the Audit, Nominating and Corporate Governance and Compensation and Benefits Committees. Mr. Cabrera is the former Chairman, President and Chief Executive Officer of UOP LLC, a Honeywell company. He is the President and Chief Executive Officer of the National Institute of Low Carbon and Clean Energy (NICE) based in Beijing, China. Mr. Cabrera also serves as a Distinguished Associate to the World Energy Consultancy Firm FACTS. Mr. Cabrera serves on the Global Advisory Board of the University of Chicago Booth School of Business. During Mr. Cabrera’s 35 years in the refining and petrochemicals industry, he has been granted seven U.S. patents, authored numerous publications and frequently serves on industry panels as a recognized business and technical leader. He has a Bachelor of Science degree in chemical engineering from the University of Kentucky and a Master’s degree in business administration from the University of Chicago. Mr. Cabrera brings to the Board extensive experience in petroleum refining, gas processing and petrochemical production as well as international business development and senior executive management experience.
BRIAN F. DOWNEY
Mr. Downey joined the Board of Directors in July 2005 and was appointed Chairman of the Audit Committee at that time. Mr. Downey also serves as a member of the Compensation and Benefits Committee and the Nominating and Corporate Governance Committee. Mr. Downey has been President of Downey & Associates Management Inc., a real estate holding company, since July 1986, and Financial Advisor to Lending Solutions, Inc., a full-service loan call centre located in the US whose clients are primarily US and Canadian financial institutions, since January 2002. From 1995 to 2002 he was a principal and served as CEO of Lending Solutions, Inc., and from 1986 to 1995 he served as President and Chief Executive Officer of Credit Union Central of Canada, the national trade association and national liquidity facility for all credit unions in Canada. Mr. Downey has a Certified Management Accountant (CMA) designation from the University of Manitoba and is a Member of the Society of Management Accountants of Ontario. Mr. Downey was selected to serve as a director on our Board due to his extensive experience and expertise in financial and accounting matters. Mr. Downey is the Company’s “audit committee financial expert” within the meaning of the Securities Exchange Act of 1934.
DR. ROBERT G. GRAHAM
Dr. Graham has been a director of the Company since April 2005 and served as the Company’s Chief Technology Officer from April 2007 to September 2007. Dr. Graham co-founded Ensyn and served on the board and in various senior executive roles with Ensyn until it was acquired by the Company in 2005. Since then, he has served as Chairman (since June 2007) and Chief Executive Officer (since July 2008), and President and Chief Executive Officer (from April 2005 to June 2007) of Ensyn Corporation. Dr. Graham has been working on the commercial development of the RTP™ biomass refining and petroleum upgrading technologies since the early 1980’s. This work culminated in the development of commercial RTP applications in the wood industry in the late 1980’s and the establishment of Ensyn Renewables Inc. to capitalize on commercial projects for this business. In 1997, Dr. Graham initiated the application of this commercial RTP™ technology in the petroleum industry. Dr. Graham holds Bachelor of Science and Bachelor of Science Honours degrees from Carlton University, and a Master of Engineering and Ph.D. in Chemical Engineering from the University of Western Ontario. Dr. Graham brings unique skill, expertise and experience to our Board as the inventor of our HTL™ technology and as a scientist and businessman with extensive experience in the technology industry.
PETER G. MEREDITH
Mr. Meredith joined the Board of Directors in December 2007 and serves as a member of the Executive Committee. He previously served as a director from 1996 to 1999 and as the Company’s Chief Financial Officer from June 1999 to January 2000. Mr. Meredith has been Deputy Chairman of Ivanhoe Mines Ltd. since May 2006 and was Chief Financial Officer of Ivanhoe Mines from May 2004 to May 2006 and from June 1999 to November 2001. He is also presently Chairman (since October, 2009) and was previously Chief Executive Officer (June 2007 to October 2009) of SouthGobi Resources Ltd, and served as Chief Financial Officer of Ivanhoe Capital Corporation from 1996 to March 2009. Prior to joining the Company, Mr. Meredith spent 31 years with Deloitte & Touche LLP, Chartered Accountants, where he retired as a partner in 1996. He was a member of its Canadian board of directors from 1991 to 1996. Mr. Meredith is a Chartered Accountant and is a member of the Institute of Chartered Accountants of British Columbia, the Institute of Chartered Accountants of Ontario and the Ordre des Comptables Agrees du Quebec. Mr. Meredith was selected to serve as a director on our Board due to his extensive experience at the senior executive and board level with international resource companies and his financial accounting, reporting and corporate finance expertise, and the depth of his knowledge of the Company’s operations and of the political and regulatory requirements of the regions in which the Company operates derived from his involvement in leadership roles with the Company and other resource companies operating in similar regions since 1996.
ALEXANDER A. MOLYNEUX
Mr. Molyneux is President and Chief Executive Officer of Canadian-based SouthGobi Resources Ltd. (TSX:SGQ, HK:1878). SouthGobi is focused on exploration and development of its Permian-age coal deposits in Mongolia’s South Gobi region to supply a wide range of coal products to markets in Mongolia and China. SouthGobi’s largest shareholder is Ivanhoe Mines Ltd. Before joining SouthGobi in 2009, Mr. Molyneux was Head of Metals and Mining Investment Banking for Citigroup where he established a leading metals and mining investment banking business in Asia. During a distinguished career at Citigroup and UBS, he advised on coal-related public offerings, mergers and acquisitions, bond and debt offerings totalling several billion dollars. Mr. Molyneux holds a Bachelor’s degree in Economics from Monash University in Australia. Mr. Molyneux was selected to serve as a director on our Board based on his comprehensive background in the areas of international capital markets, corporate finance and investment banking in Asia and elsewhere and his experience in doing business in the natural resource sector in China and Mongolia.
ROBERT A. PIRRAGLIA
Mr. Pirraglia has been a director of the Company since April 2005 and acted as the Chair of the Business Development Committee from August 2007 until May 2008. He is currently a member of the Compensation and Benefits Committee and the Nominating and the Corporate Governance Committee. Mr. Pirraglia is an engineer and attorney with more than 25 years of experience in the development of energy projects and projects employing innovative technologies. He served on the board of Ensyn Group, Inc. starting in 1996, and was also Chief Operating Officer of Ensyn Group, Inc. from September 1998 to April 2005. He is currently Executive Vice President of Ensyn Corporation and was the Chief Operating Officer and Vice President of the Company from April 2005 to October 2007. He is also a director of Pirraglia Associates, Inc. and RRP Development Holdings, LLC. In addition to being a founder and manager of several energy and waste processing companies, Mr. Pirraglia has provided management and business consulting services to various US, Canadian and European companies. Mr. Pirraglia holds a Bachelor of Electrical Engineering degree from New York University and a J.D. from Fordham University School of Law. Mr. Pirraglia brings significant legal, technical and project management experience and expertise to our Board as well as governance experience acting as a public company director.
DAVID A. DYCK
Mr. Dyck was appointed President and Chief Operating Officer of the Company in May 2010 and continues to serve as President and Chief Executive Officer of Ivanhoe Energy Canada Inc. Mr. Dyck was the Executive Vice President, Capital Markets from October 2009 to May 2010. Prior to his appointment with Ivanhoe Energy Canada, Mr. Dyck served as President and Chief Executive Officer of LeaRidge Capital Inc. (January 2008 to October 2009) and as Senior Vice President Finance and Chief Financial Officer of Western Oil Sands Inc. (April 2000 to October 2007).
GERALD D. SCHIEFELBEIN
Mr. Schiefelbein has been the Chief Financial Officer of the Company since November 2009. Prior to his appointment as Chief Financial Officer, Mr. Schiefelbein served as Chief Financial Officer, Oil Americas - BP p.l.c. (September 2007 to February 2009), Controller, Oil Americas - BP p.l.c. (February 2006 to September 2007) and Controller, Other Businesses and Corporate (September 2003 to February 2006) for BP p.l.c., one of the world’s largest energy companies.
IAN BARNETT
Mr. Barnett has been the Executive Vice President, Corporate Development of the Company since March 2007. From January 2005 to November 2005, Mr. Barnett was a consultant to the Company and was Vice President, Finance from November 2005 to March 2007. Mr. Barnett is a member of the Board of Ensyn Corporation and has been a director (since 1996) and consultant (1999-2007) to various companies in the Ensyn group of companies. He is also co-founder and has been a director of Heptagon Investments Ltd. since 1991.
K. C. PATRICK CHUA
Mr. Chua has been Executive Vice President of the Company since June 1999 and Chairman of the Company’s subsidiary Sunwing Energy Ltd. since April 2004. From March 2000 to April 2004 he was President of Sunwing Energy Ltd.
DAVID R. MARTIN
Mr. Martin is the President, Chief Executive Officer and Co-Chairman of Ivanhoe Energy Latin America Inc. and Co-Chairman of Ivanhoe Energy Ecuador Inc., the Company’s wholly owned subsidiaries. He was the Chairman of the Company from August 1998 to May 2006 at which time he was appointed as Executive Co-Chairman, serving in the position until May 2008.
Mr. Martin has over 50 years of international experience in the oil and gas industry, having spent 26 years in senior management positions with Occidental Petroleum Corporation. Part of the founding team at Occidental Petroleum, Mr. Martin was President and Chief Executive Officer of Occidental Oil & Gas Corporation from 1983 to 1996. He was also Executive Vice-President and a director of Occidental Petroleum Corporation and a director of Canadian Occidental Petroleum.
GERALD G. MOENCH
Mr. Moench has been Executive Vice President of the Company since June 1999 and President of the Company’s subsidiary Sunwing Energy Ltd. since April 2004.
MICHAEL A. SILVERMAN
Mr. Silverman has been the Executive Vice President, Technology and Chief Technology Officer of the Company since September, 2007. From May, 2007 to September, 2007 he was Vice President, Technology of the Company. Prior to joining the Company, Mr. Silverman served as Vice President, Petrochemicals (May 2004 to May 2007) and Director, Technology Center (May 2000 to May 2004) for KBR, Inc.
EDWIN J. VEITH
Mr. Veith has been Executive Vice President, Upstream of the Company since September 2007. Mr. Veith has also been Vice President, HTL Technology of Ivanhoe Energy (USA) Inc. from November 2005 until June 2009. From June 2001 to November 2005, he was Chief Reservoir Engineer of Ivanhoe Energy (USA) Inc.
OTHER PUBLIC COMPANY DIRECTORSHIPS
The following is information respecting directorships held by our directors over the last five years at public and registered investment companies.
Messrs. Howard R. Balloch, Peter G. Meredith and Robert M. Friedland are all directors of Ivanhoe Mines Ltd. Mr. Balloch is also a director of Methanex Corporation and Canaccord Financial Inc. and was previously a director of East Energy Corp. and Tiens Biotech Group USA Inc. Messrs. Friedland and Meredith are both directors of Ivanhoe Australia Limited. Mr. Friedland was a director of Potash One Inc., a Canadian public company. Mr. Meredith is also a director of Entrée Gold Inc., SouthGobi Resources Ltd. and Great Canadian Gaming Corporation, and was previously a director of Jinshan Gold Mines Inc. (renamed China Gold International) and Olympus Pacific Minerals Inc. Mr. Molyneux is a director of SouthGobi Resources Ltd. Mr. Cabrera is also a director of GEVO, Inc.
BOARD COMMITTEES
As required under the Business Corporations Act (Yukon) and under section 3(a)(58)(A) of the Exchange Act, our Board of Directors has a separately designated standing Audit Committee. The members of the Audit Committee are Messrs. Brian F. Downey (Chair), A. Robert Abboud and Carlos A. Cabrera. Mr. Downey, one of our current independent directors, has been determined by the Board of Directors to be an Audit Committee financial expert. We believe that Mr. Downey’s prior experience working as a Certified Management Accountant and significant financial and business experience at the executive levels of management qualifies him to be an Audit Committee financial expert.
We also have a Compensation and Benefits Committee, a Nominating and Corporate Governance Committee and an Executive Committee. The current members of the Compensation and Benefits Committee are Messrs. Howard R. Balloch (Chair), Robert A. Pirraglia, Carlos A. Cabrera and Brian F. Downey. The current members of the Nominating and Corporate Governance Committee are Messrs. Howard R. Balloch (Chair), Robert A. Pirraglia, Brian F. Downey, Carlos A. Cabrera and A. Robert Abboud. The current members of the Executive Committee are Messrs. Robert M. Friedland (Chair), A. Robert Abboud, Howard R. Balloch and Peter G. Meredith.
CODE OF BUSINESS CONDUCT AND ETHICS
We have a Code of Business Conduct and Ethics applicable to all employees, consultants, officers and directors regardless of their position in our organization, at all times and everywhere we do business. The Code of Business Conduct and Ethics provides that our employees, consultants, officers and directors will uphold our commitment to a culture of honesty, integrity and accountability and that we require the highest standards of professional and ethical conduct from our employees, consultants, officers and directors. A copy of our Code of Business Conduct and Ethics, as amended, may be obtained, without charge, by request to Ivanhoe Energy Inc., Suite 654-999 Canada Place, Vancouver, British Columbia, Canada V6C 3E1, Attention: Corporate Secretary or by phone to 604-688-8323.
We are a foreign private issuer that voluntarily files its annual reports on Form 10-K. As permitted by Item 402(a)(1) of Regulation S-K, we follow the disclosure requirements applicable in Canada with respect to executive compensation (Form 51-102 of the Canadian Securities Administrators), which we believe address the requirements of, and require more detailed information than, Items 6.B and 6.E.2 of Form 20-F.
COMPENSATION DISCUSSION AND ANALYSIS
Compensation and Benefits Committee, Philosophy and Goals
The Company’s executive compensation program is administered by the Compensation and Benefits Committee (“Compensation Committee”). The members of the Compensation Committee are all independent directors. Following review and approval by the Compensation Committee, decisions relating to executive compensation are reported to, and approved by, the Board of Directors.
In determining the nature and quantum of compensation for the Company’s executive officers the Company is seeking to achieve the following objectives, in approximately an equal level of importance:
•
to provide a strong incentive to management to contribute to the achievement of Ivanhoe’s short-term and long-term corporate goals;
•
to ensure that the interests of Ivanhoe’s executive officers and the interests of the Company’s shareholders are aligned;
•
to ensure that Ivanhoe is able to attract, retain and motivate executive officers of the highest caliber in light of the strong competition in the oil and gas industry for qualified personnel;
•
to recognize that the successful implementation of Ivanhoe’s corporate strategy cannot necessarily be measured, at this stage of its development, only with reference to quantitative measurement criteria of corporate or individual performance; and
•
to provide fair, transparent, and defensible compensation
Recent Developments Related to Executive Compensation
Effective May 18, 2010, David A. Dyck was promoted to the position of President and Chief Operating Officer of Ivanhoe. On September 3, 2010, Greg Phaneuf was appointed Senior Vice President, Corporate Development of Ivanhoe and Ian Barnett provided notice that effective March 31, 2011, he will resign from his position as Executive Vice President, Corporate Development of the Company to pursue other business interests.
How We Make Compensation Decisions
The Compensation Committee oversees and sets the general guidelines and principles for the implementation of the Company’s executive compensation policies, assesses the individual performance of the Company’s executive officers and makes recommendations to the Board of Directors. Based on these recommendations, the Board of Directors makes decisions concerning the nature and scope of the compensation to be paid to the Company’s executive officers. The Compensation Committee bases its recommendations to the Board on Ivanhoe’s compensation philosophy and on individual and corporate performance.
The Compensation Committee annually reviews, and recommends to the Board, the cash compensation, any annual performance bonus, long term incentive grants and overall compensation package for each of the Corporation’s executive officers.
Decisions for base salary adjustments are usually made during the first quarter of the new fiscal year. Although specific individual targets were not set for executives for the 2010 year, in the normal course of business, targets for performance bonuses for the fiscal year are set at the beginning of the fiscal year, and decisions on actual bonuses are made at some point during the first quarter following the end of the fiscal year. Incentive awards are ordinarily made during the first quarter following the end of the fiscal year. In the normal course of business, management presents its compensation recommendations for consideration by the Compensation Committee.
The Compensation Committee may seek compensation advice where appropriate from external consultants, and based on significant changes to the Company’s executive management team in 2009, the Compensation Committee instructed senior management to make a series of executive compensation proposals to the Compensation Committee. Subsequently, in the second quarter of 2010 the Compensation Committee engaged the services of the consulting firm Mercer Canada Ltd. to undertake a comprehensive review of executive compensation for named executive positions and other senior management positions. For 2011 and beyond, the Company will be implementing a new compensation program based on the results of the Mercer study and incorporating specific performance targets and objectives. Certain aspects of this new program were applied in 2010 to decisions relating to long term incentive awards in October 2010.
Since no performance targets or objectives were adopted upon which to base executive compensation decisions for the 2010 fiscal year, the Compensation Committee based its decisions for the purposes of establishing 2010 base salaries and bonuses awarded in 2010 in respect of the 2009 fiscal year on available industry data and a subjective review of the role played by senior management in corporate performance and achievements.
Elements of Total Compensation
The compensation package that the Company provides to its executive officers generally consists of base salary, annual performance bonuses and equity incentives. The Company’s compensation policy reflects a belief that an element of total compensation for the Company’s executive officers should be “at risk” and in the form of common shares or incentive stock options so as to create a strong link to build shareholder value. In setting compensation levels, the Compensation Committee takes into account an executive’s past performance, future expectations for performance and also considers both the cumulative compensation being granted to executives as well as internal and external equity amongst the Company’s executives. At this stage of the Company’s development, the Company also considers the available cash resources of the Company.
The following summarizes the primary purpose of each compensation element and its emphasis:
•
Base salary - paid in cash as a fixed amount of compensation for performing the day to day responsibilities of the job.
•
Performance bonus - annual award, paid in cash and earned for the achievement of near term critical strategic corporate and project goals.
•
Long Term Incentive awards - annual equity award, in the form of a combination of stock options and restricted share units, granted to align the interests of the executive with longer term Company goals, the creation of shareholder value and the retention of key executives.
Peer Comparator Group
A new comparator group was established in 2010 as part of the process of establishing a new executive compensation program. The comparator group includes oil and gas companies with international operations, oil sands operations and similar market capitalization. The comparator group was composed of Pacific Rubiales Energy Corporation, Black Pearl Resources Inc., Niko Resources Ltd., Connacher Oil & Gas Ltd., Athabasca Oil Sands Corporation, OPTI Canada Inc., Petrobank Energy & Resources Ltd., TransGlobe Energy Corporation, Bankers Petroleum Ltd., Ithaca Energy Inc., Gran Tierra Energy Inc., Calvalley Petroleum Inc., Paramount Resources Ltd., Pan Orient Energy Corporation, UTS Energy Corporation, Southern Pacific Resources Corporation, Transatlantic Petroleum Ltd. and Oilsands Quest Inc.
However, for purposes of establishing 2010 base salaries and bonuses for the 2010 fiscal year in respect of the 2009 fiscal year, the Compensation Committee relied on data from the comparator group and externally generated survey data from the energy sector, primarily in the category of exploration and production companies.
Base Salary
The base salaries of the Company’s executive officers are determined at the commencement of employment as an executive officer by the terms of the executive officer’s employment contract. The base salary is determined by a subjective assessment of each individual’s performance, experience and other factors the Company believes to be relevant, including prevailing industry demand for personnel having comparable skills and performing similar duties, the compensation the individual could reasonably expect to receive from a competitor and the Company’s ability to pay.
Under the Company’s compensation program and onward, salary levels are to be assessed using a pay grade system that is consistent with industry practice. Each of the Company’s employees, including the Company’s executive officers, is placed in a pay grade based upon his or her position, knowledge, skills, relevant experience and credentials. Annual salary increases are made based on performance and the relative position within a pay grade. The Compensation Committee also considers retention risks, succession requirements and compensation changes in the market in determining salary changes.
Cash Performance Bonus
The annual bonus program is intended to align the performance of the Company’s employees with the near term critical goals defined in the annual business plan. The program calls on the same pay grade system used to establish base salary to be used for determining the bonus targets for each employee.
Prior to adoption of the Company’s new compensation plan under the existing plan potential bonus amounts in the ordinary course were expected to range from 40% of salary (target) and 60% of salary (maximum) for the Company’s Chief Financial Officer and 25%-30% of salary (target) and 37.5%-45% of salary (maximum) for other executive officers. However, for the 2010 year, specific performance targets were not set and individual executives were evaluated subjectively in terms of their contribution to overall corporate objectives and execution of the corporate business plan.
Under the new compensation plan for 2011 and onwards, cash bonuses are awarded to the Company’s executive officers and senior non-executive management according to the performance of the Company and the success in meeting, or exceeding, the annual established corporate and project targets. For executive officers, potential bonus awards can range from 55% to 75% of base salary multiplied by a weighted achievement factor ranging from 0% to 200%.
Long Term Incentive Plan
Equity based compensation is granted to the Company’s executive officers and management. This long term incentive portion of salary is meant to retain key employees over the long term and to focus the efforts of those individuals on shareholder return and the longer broader goals of the organization. To remain competitive within the industry and to provide parity with compensation levels within the Comparator Peer Group, equity grants are used to enhance the overall total compensation package.
Equity based compensation is determined as a percentage of base pay and may have a combination of stock option grants and restricted share units, the combination of which is determined by the pay grade level. The higher the grade level the higher the weighting towards “at risk” stock option grants.
All outstanding stock options that have been granted under the Company’s Equity Incentive Plan were granted at prices not less than 100% of the fair market value of the Company’s common shares on the dates such options were granted. In addition, the Board of Directors has traditionally taken an approach to vesting that is based on the passage of time and option exercise periods and vesting schedules for options granted to executive officers are determined by the Compensation Committee and the Board of Directors.
Under the new compensation plan, equity grants are awarded to the Company’s executive officers and senior non-executive management according to performance and the success in meeting or exceeding the annual established corporate and project targets. For executive officers, potential value of equity grants can range from 160% to 225% of base salary multiplied by a weighted achievement factor ranging from 0% to 200%. For the 2010 year, specific performance targets were not set and individual executives were evaluated subjectively in terms of their contribution to overall corporate objectives and execution of the corporate business plan.
The new compensation plan for 2011 will result in the establishment of a Restricted Share Unit Plan to provide a form of equity compensation that is less dilutive than produced by a plan based on options. The amounts awarded through the Restricted Share Unit Plan will be shares purchased on the TSX through a Trustee. Restricted Share Units are subject to the vesting provisions of the plan. Should the employee voluntarily leave the employment of the Company any unvested Restricted Share Units are forfeited by the employee under the terms of the plan.
2010 EXECUTIVE COMPENSATION DECISIONS
Salary Compensation
Robert Friedland, Executive Co-Chairman and Chief Executive Officer, has voluntarily waived a cash salary from Ivanhoe to help conserve the Company’s cash.
Pending finalization and adoption of the Company’s new compensation plan, the Company determined to increase base salaries for executive officer’s by 4.2%, which percentage was established with reference to the average increase in base salaries for executives of Canadian exploration and production companies reported as part of the externally generated compensation data in respect to the Canadian oil and gas industry upon which the Compensation Committee relied. Exceptions to this include significant changes in roles and responsibilities during the year.
Bonus Compensation
As specific performance targets were not set for individual executives, bonuses awarded in 2010 in respect of the 2009 fiscal year were awarded based on subject criteria in terms of the individual executive’s contribution to overall corporate objectives and execution of the corporate business plan. In March 2010, the Compensation Committee created a bonus pool having an aggregate value of approximately $1.4 million from which bonuses for the entire Company would be drawn, representing approximately 18.7% of aggregate base salaries paid by the Company to its executive officers and other senior management staff during the prior fiscal year. This percentage was established with reference to the Compensation Committee’s understanding of what Canadian exploration and production companies paid based on externally generated compensation data in respect of the Canadian oil and gas industry and upon which the Compensation Committee relied. The Compensation Committee also allocated an additional $250,000 for payment of additional bonuses to executives perceived by the Compensation Committee as having achieved extraordinary performance. The final allocation was made with input from the Company’s Chief Executive Officer, who did not accept any salary or bonus.
Incentive Compensation
For the 2010 year, specific performance targets were not set and individual executives were evaluated subjectively in terms of their contribution to overall corporate objectives and execution of the corporate business plan. The Compensation Committee also considered overall compensation factors, the need to retain valuable employees and the practices of comparator companies.
In April 2010, at the recommendation of the Compensation Committee, the Company granted options to purchase 250,000 common shares to David R. Martin, President, CEO and Co-Chairman of Ivanhoe Energy Latin America Inc., in recognition of his considerable efforts made on behalf of the Company to advance its projects and business interests in Latin America.
In October, 2010, at the recommendation of the Compensation Committee, the Company granted options to purchase 1,000,000 common shares to Robert M. Friedland, Executive Co-Chairman and Chief Executive Officer, in recognition of the considerable efforts made on behalf of the Company to advance its projects and business interests without receiving an annual salary. In October 2010, the Company further granted options to purchase 200,000 common shares to
David A. Dyck, President and Chief Operating Officer, and 130,000 shares to each of David M. Martin, President, CEO and Co-Chairman of Ivanhoe Energy Latin America Inc., Edwin J. Veith, Executive Vice-President, Upstream, and Gerald Schiefelbein, Chief Financial Officer.
Other Compensation
The Company does not provide its executive officers with a pension plan and the share purchase plan of the Company has not been activated. In 2010, the Company paid Mr. Veith US$22,000 for the purpose of contributing to his 401(k) retirement plan and $28,570 as an expatriate housing allowance.
Performance Graph
The following graph shows the change in a Cdn$100 investment in Ivanhoe common shares over the past five years, compared to the S&P/TSX Composite Index, the S&P/TSX Oil & Gas Exploration & Production and the S&P/TSX Energy Sector Index. Our common shares were added to the S&P/TSX Composite Index on March 22, 2010.
The trend in overall compensation paid to the Company’s executive officers over the past five years has not tracked the performance of the market price of the Company’s common shares, or the S&P/TSX Composite Index, particularly since 2007. Market price targets of the Company’s common shares have, however, been included as a component of the Company’s annual bonus incentives.
Option-Based Awards
Please see the section “Incentive Compensation” in the Compensation Discussion and Analysis for a discussion of the Company’s approach to option-based awards.
In 2010, the Company issued option-based awards under its Equity Incentive Plan to executive officers as described under the heading “2010 Executive Compensation Decisions.”
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation earned by the individuals who served as our Chief Executive Officer, our Chief Financial Officer and by each of our other three most highly compensated executive officers as of the end of 2010 (the “Named Executive Officers” or “NEOs”). Our NEOs may change from year to year due to fluctuations in our executive officers’ annual compensation.
(1)
Amounts paid in Canadian dollars to Messrs. Dyck and Schiefelbein were converted to US currency based on the monthly average exchange rate during the pay periods.
(2)
Estimated fair value on date of grant calculated using the Black Scholes option pricing model. Key assumptions are outlined in Note 9 to the consolidated financial statements. The value of stock options with a Canadian dollar exercise price was converted to US dollars using the Bank of Canada exchange rate on date of grant.
(3)
A cash bonus was paid in 2010 in connection with the NEOs performance in 2009. The bonus was not previously disclosed as the amounts had not been finalized by the filing date of our 2009 10K report.
(4)
Mr. Friedland is also a director of the Company. Pursuant to the Company’s policies regarding management directors, Mr. Friedland does not receive compensation from the Company for acting as a director.
(5)
Mr. Dyck joined the Corporation effective October 21, 2009, and was employed for approximately two months during 2009.
(6)
Mr. Schiefelbein joined the Corporation effective October 1, 2009, and was employed for three months during 2009.
(7)
Stock options were awarded to Mr. Martin in 2010 in connection with 2009 events. The options were not previously disclosed as they had not been finalized by the filing date of our 2009 10K report.
(8)
Estimated fair value calculated as the closing trading price for the Company’s common shares on August 5, 2008, when a treasury order for the award was delivered to the Company’s transfer agent, multiplied by the number of common shares awarded.
(9)
Includes $28,570 paid as an expatriate housing allowance. Ivanhoe reimburses Mr. Veith for the difference between the actual Canadian income taxes paid by him and the US income taxes that would have been paid if Mr. Veith had remained in the US. This amount has not yet been determined for 2010.
INCENTIVE PLAN AWARDS
To value stock options awarded to our NEOs, we used the Black Scholes option pricing model. The actual value realized on exercises may be higher or lower depending on our common share price at the time of exercise.
Outstanding option-based awards at December 31, 2010
(1)
Calculated as the difference between the December 31, 2010, closing market price of our common shares and the exercise price of the options, multiplied by the number of unexercised options. The value of options with a US dollar exercise price is calculated using the NASDAQ closing price of $2.72 per common share. The value of options with a Canadian dollar exercise price is calculated using the TSX closing price of Cdn$2.72 per common share and converted to US dollars using the December 31, 2010, Bank of Canada closing rate. Where the exercise price exceeds the market value per common share, the value is zero.
Incentive plan awards - value vested in 2010
(1)
Calculated as the difference between the closing market price of our common shares on the vesting date and the exercise price of the options, multiplied by the number of options vesting in the current year. The value of options with a Canadian dollar exercise price were converted to US dollars using the Bank of Canada closing rate on the vesting date. Where the exercise price exceeds the market price per common share, the value is nil.
PENSION PLAN
Employees of Ivanhoe Energy Holdings Inc. (the “Employees”) may participate in Ivanhoe’s 401(k) (the “Plan”). The Plan is a defined contribution plan that includes Employee and Company contributions. Employees may contribute up to the maximum amount established by the Internal Revenue Code and the Company may elect to make annual discretionary matching and profit sharing contributions. Employee contributions vest immediately and Company contributions vest after two years of service. Investment decisions are made by the Employee from a variety of investment options.
The following table represents the value of accumulated pension assets within the Plan for Messrs. Martin and Veith. There were no above-market or preferential earnings provisions.
TERMINATION AND CHANGE OF CONTROL BENEFITS
The Company has written contracts of employment with Messrs. Dyck and Schiefelbein. In the case of termination for cause or voluntary resignation, the employment contracts do not result in incremental payments, payables or benefits, and therefore have been excluded from the following discussion. Perquisites and other personal benefits totalling less than $50,000 have also been omitted.
Estimated incremental payments are based on the individual’s annual salary as at December 31, 2010. Any amounts payable in Canadian dollars have been translated to US dollars using the December 31, 2010, Bank of Canada closing rate. Unexercised stock options were valued using the December 31, 2010, closing market price of our common shares and stock options with a Canadian dollar exercise price were converted to US dollars using the December 31, 2010, Bank of Canada closing rate.
David A. Dyck
Mr. Dyck’s employment contract provides that:
(a)
in the case of termination without cause or termination upon disability, the Company must pay twelve months wages in a lump sum, cause all of the unvested stock options that would vest in the succeeding twelve months to vest immediately and generally remain exercisable for six months;
(b)
in the case of termination of the employment contract by the Company within twelve months of a change of control, the Company must pay twelve months wages in a lump sum and cause all stock options to vest immediately and generally remain exercisable for six months; and
(c)
Mr. Dyck is bound by a confidentiality clause that is effective for three years after the termination of active employment.
The estimated incremental payments to Mr. Dyck in the above scenarios are (a) a lump sum of US$366,673 and accelerated vesting of stock options valued at US$167,655; and (b) a lump sum of US$366,673 and accelerated vesting of stock options valued at US$167,655.
Gerald D. Schiefelbein
Mr. Schiefelbein’s employment contract provides that:
(a)
in the case of termination without cause or termination upon disability, the Company must pay twelve months wages in a lump sum, cause all of the unvested stock options that would vest in the succeeding twelve months to vest immediately and generally remain exercisable for six months;
(b)
in the case of termination of the employment contract by the Company within twelve months of a change of control, the Company must pay twelve months wages in a lump sum and cause all of the unvested stock options to vest immediately and remain generally exercisable for six months;
(c)
in the case that Mr. Schiefelbein does not continue to have all the necessary work permits to be employed in Canada and is unable to fulfill the role of CFO due to legal or regulatory requirements, the Company must pay six months wages in a lump sum, vested stock options will remain generally exercisable for six months from the date that employment terminates, all unvested stock options will terminate immediately;
(d)
Mr. Schiefelbein is bound by a non-competition clause effective until the later of twelve months after the termination of active employment or the date he no longer receives compensation of any kind under the employment contract;
(e)
Mr. Schiefelbein is bound by a non-solicitation clause effective for twelve months after the termination of active employment; and
(f)
Mr. Schiefelbein is bound by a confidentiality clause that is effective for three years after the termination of active employment.
The estimated incremental payments to Mr. Schiefelbein in the above scenarios are (a) a lump sum of US$272,399 and accelerated vesting of stock options valued at US$89,182; (b) a lump sum of US$272,399 and accelerated vesting of stock options valued at US$89,182; and (c) a lump sum of US$136,200.
DIRECTOR COMPENSATION
Each non-management director other than Mr. Abboud, the Lead Director, and Mr. Cabrera, receives US$40,000 per annum for acting as a director of the Company. Mr. Abboud, as Co-Chairman and Lead Director, and Mr. Cabrera, as Co-Chairman and Lead Director of the Company’s wholly owned subsidiaries, Ivanhoe Energy Latin America Inc. and Ivanhoe Energy Ecuador Inc., receive US$80,000 per annum. Mr. Balloch receives an additional $10,000 for his duties as Chairman of the Nominating and Corporate Governance and Compensation and Benefits Committees. Effective August 1, 2010, Mr. Downey receives an additional $10,000 for his duties as Chairman of the Audit Committee. In addition, directors receive $1,000 for each board meeting and committee meeting attended in person or by conference telephone.
NON-MANAGEMENT DIRECTOR COMPENSATION TABLE
The following compensation was earned by non-management directors in 2010.
(1)
Estimated fair value of stock options on date of grant calculated using the Black Scholes option pricing model. Key assumptions are outlined in Note 9 to the consolidated financial statements. The value of stock options with a Canadian dollar exercise price was converted to US dollars using the Bank of Canada exchange rate on date of grant.
Outstanding option-based awards at December 31, 2010
(1)
Calculated as the difference between the December 31, 2010, closing market price of our common shares and the exercise price of the options, multiplied by the number of unexercised options. The value of options with a US dollar exercise price is calculated using the NASDAQ closing price of $2.72 per common share. The value of options with a Canadian dollar exercise price is calculated using the TSX closing price of Cdn$2.72 per common share and converted to US dollars using the December 31, 2010, Bank of Canada closing rate. Where the exercise price exceeds the market value per common share, the value is nil.
Incentive plan awards - value vested in 2010
(1)
Calculated as the difference between the closing market price of our common shares on the vesting date and the exercise price of the options, multiplied by the number of options vesting in the current year. The value of options with a Canadian dollar exercise price were converted to US dollars using the Bank of Canada closing rate on the vesting date. Where the exercise price exceeds the market price per common share, the value is nil.
ITEM 12:
ITEM 12:
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Ivanhoe’s common shares are the only class of voting securities. Based on information known to the Company, the following table shows each person or group who beneficially owns (pursuant to SEC Regulations) more than 5% of our voting securities as at March 4, 2011.
(1)
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Unissued common shares subject to options, warrants or other convertible securities currently exercisable or convertible, or exercisable or convertible within 60 days, are deemed outstanding for the purpose of computing the beneficial ownership of common shares of the person holding such convertible security but are not deemed outstanding for computing the beneficial ownership of common shares of any other person.
(2)
Includes 48,794,620 common shares and 2,200,000 common shares issuable upon the exercise of common share purchase warrants held indirectly through Newstar Securities SRL, Premier Mines SRL and Evershine SRL, companies controlled by Mr. Friedland. Also includes 2,000,000 common shares issuable upon the exercise of stock options and 417,105 common shares held directly by Mr. Friedland.
(3)
Includes 4,697,734 unissued common shares issuable to directors and senior officers upon exercise of incentive stock options and 2,210,500 common shares issuable upon the exercise of common share purchase warrants.
Security Ownership of Management
The following table sets forth the beneficial ownership, pursuant to SEC Regulations, as at March 4, 2011, of our common shares by each of our directors, our executive officers and by all of our directors and executive officers as a group:
(1)
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Unissued common shares subject to options, warrants or other convertible securities currently exercisable or convertible, or exercisable or convertible within 60 days, are deemed outstanding for the purpose of computing the beneficial ownership of common shares of the person holding such convertible security but are not deemed outstanding for computing the beneficial ownership of common shares of any other person.
(2)
Includes 48,794,620 common shares and 2,200,000 common shares issuable upon the exercise of common share purchase warrants which are held indirectly through Newstar Securities SRL, Premier Mines SRL and Evershine SRL, companies controlled by Mr. Friedland. 417,105 common shares are held directly by Mr. Friedland.
(3)
Includes 10,500 common shares issuable upon the exercise of common share purchase warrants.
Securities Authorized for Issuance under Equity Compensation Plans
All of the incentive stock options and equity compensation awards the Company granted in 2010 were made under the Company’s Equity Incentive Plan. The Equity Incentive Plan is the only equity compensation plan the Company has in effect and is intended to further align the interests of the Company’s directors and management with the Company’s long term performance and the long term interests of the Company’s shareholders. The Company’s shareholders have approved the Equity Incentive Plan and all amendments thereto. The following information is as at December 31, 2010:
ITEM 13:
ITEM 13:
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
RELATED TRANSACTIONS
Ivanhoe is party to cost sharing agreements with other companies, some of which are wholly or partially owned by Mr. Friedland. Through these agreements, we share office space, furnishings, equipment, air travel and communications facilities in various international locations. We also share the costs of employing administrative and non-executive management personnel at these offices. In 2010, our share of these costs was $2.0 million.
In 2008, we agreed, as part of our cost sharing arrangements and in connection with Mr. Friedland’s position as Chief Executive Officer, to share the costs of operating an aircraft owned by a private company of which Mr. Friedland is the sole shareholder. Ivanhoe paid $1.2 million towards aircraft operating costs in 2010.
A director of the Company, Dr. Robert Graham, was engaged to provide services through his private consulting company. In 2010, the Company paid $52,000 to his firm.
Our Board of Directors recognizes that related party transactions present a heightened risk of conflicts of interest and therefore has a written policy that is part of our Code of Business Conduct and Ethics. This policy prohibits activities that could give rise to conflicts of interest, unless they are specifically approved by the Board of Directors. Directors and officers are obligated to inform us of any related party transactions and any proposed related party transactions. In addition, we present a summary of related party transactions to the Audit Committee on a quarterly basis for its review and approval.
DIRECTOR INDEPENDENCE
We undertook a review of the independence of our directors and, using the definitions and independence standards for directors established under NASDAQ and Canadian Securities Administrators’ National Instrument 58-101, “Disclosure of Corporate Governance Practices.” As a result of this review, we determined that each of Messrs. Abboud, Balloch, Downey, Cabrera and Pirraglia is considered to be an independent director.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
In considering the nature of the services provided by Deloitte & Touche LLP (“Deloitte”), the Audit Committee determined that such services are compatible with the provision of independent audit services. The Audit Committee discussed these services with Deloitte and our management to determine that they were permitted under the rules and regulations concerning auditor independence promulgated by the SEC to implement the Sarbanes-Oxley Act of 2002, as well as the American Institute of Certified Public Accountants. In accordance with our policy, all of the services outlined below were pre-approved by our Audit Committee.
Audit fees in 2010 and 2009 include services related to the audit of our annual consolidated financial statements and the review of our interim consolidated financial statements. Fees were also incurred in 2010 and 2009 for the audit of internal controls related to requirements under the United States Sarbanes-Oxley Act of 2002 and similar Canadian regulatory compliance.
Audit related fees include services performed to translate the annual and quarterly consolidated financial statements into French as well as the reimbursement of the pro-rata share of annual fees charged to each audit firm by the Canadian Public Accountability Board.
Tax services performed by Deloitte, outside of normal audit procedures, consisted of tax compliance and tax planning and advice. Tax compliance services consisted of Federal, state and local income tax return assistance, preparation of expatriate tax returns and assistance with tax return filings in certain foreign jurisdictions. Tax planning and advice was rendered in connection with the structuring of intercompany transactions as well as proposed mergers, acquisitions and disposals. In 2009, additional tax assistance was provided in connection with the disposition of our US operations.
Other non-audit fees in 2010 relate to services provided in connection with a common share prospectus and support for our transition to IFRS on January 1, 2011. Both 2010 and 2009 include fees for a subscription to an accounting research tool and human capital salary information.
AUDIT COMMITTEE PRE-APPROVAL POLICY
The Audit Committee has adopted a pre-approval policy for services that may be provided by the Company’s auditors. A description of the services expected to be performed by Deloitte in the following fiscal year is presented to the Audit Committee for approval. If services that were not pre-approved are required, approval may be granted by the Chairman of the Audit Committee. However, the Chairman must inform the Audit Committee, at the next regularly scheduled meeting, of any services that were pre-approved by him. Additionally, the Audit Committee generally requests a range of fees associated with each proposed service. On a quarterly basis, the Audit Committee reviews the status of services and fees incurred year-to-date against the original estimates and the forecast of remaining services and fees.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
We refer you to the consolidated financial statements and Supplementary Data in Item 8 of this Annual Report where these documents are listed. The following exhibits are filed as part of this Annual Report:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 16, 2011.
IVANHOE ENERGY INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 16, 2011.