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In addition, a higher debt-to-cash-flow ratio will mean an increase in stamping fees, and correspondingly, interest rates. 

## Foreign exchange rates 

Prices for crude oil are determined in global markets and generally denominated in US dollars. Natural gas prices are largely influenced by both US and Canadian supply and demand structures. Changes in the Canadian dollar relative to the US dollar have no material direct effect on the Company’ s results; nevertheless, there is indirect linkage and variation in the Canadian-US dollar exchange rate will affect Canadian dollar prices for the Company’ s production. In addition, costs of imported materials used in the Company’ s operations will be affected by the Canadian-US dollar exchange rate. 

## Sensitivities 

Using the Company’ s actual production volumes, royalty rates and debt levels for the year ended December 31, 2014, the estimated after-tax effect that changes in certain factors would have on net income and income per share is set out below: 

<img src='content_image/204840.jpg'>

The Company’ s income tax assets are sufficient to eliminate taxes payable on the increases to income resulting from above; accordingly, before and after tax amounts are the same. 

## Liquidity risk 

Liquidity difficulties would emerge if the Company is unable to establish or maintain a profitable production base and thus generate sufficient cash flow to cover both operating and capital requirements. This may be the consequence of insufficient cash flows resulting from low product prices; production interruptions; operating or capital cost increases; unsuccessful investment programs; access to markets; or delays in bringing on stream new wells or facilities. These risks cannot be eliminated; however, the Company uses the following guidelines to address financial exposure: 

• internal cash flow provides the initial source of funding on which the Company’ s capital expenditure program is based; 

• debt, if available, may be utilized to expand capital programs, including acquisitions, when it is deemed appropriate and where debt retirement can be controlled; 

• equity, if available on acceptable terms, may be raised to fund acquisitions and exploration expenditures; 

farm-outs of projects may be arranged if management considers that a project requires too much capital or where the project affects the Company’ s investment risk profile. 

## 14. CAPITAL MANAGEMENT 

The Company’ s capital structure is comprised of shareholders’equity and bank indebtedness. The Company’ s objective when managing capital is to maintain financial flexibility to support capital programs that will replace production sold as well as production declines and provide a base for future production expansion. Capital management involves the preparation of an annual budget, which is implemented after approval by the Company’ s Board of Directors. As the Company’ s business evolves, the budget will be amended; however, any changes are again subject to approval by the Board of Directors. 

Cash flow, bank financing and potential proceeds from the issue of equity and the sale of assets will be invested in exploration and development operations with the intent of growing short and medium term operating cash flow. It may be that capital currently available to the Company is insufficient to adequately grow cash flow, thus requiring additional capital which may be available only on terms dilutive to existing shareholders, if available at all. Increased cash flow enables the Company to expand bank or other debt financing, an additional source of investment capital. 

