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TRILLION ENERGY INTERNATIONAL INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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06/25/2019 | 04:32pm EDT

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide readers of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. Our MD&A is presented in the following sections:



  ? Executive Summary

  ? Results of Operations

  ? Liquidity and Capital Resources

  ? Forward-Looking Information



Our MD&A should be read in conjunction with our unaudited financial statements of Trillion Energy International Inc. ("Trillion Energy", Company", "we", and "our" and formerly known as Park Place Energy, Inc.) and related Notes in Part I, Item 1 of the Quarterly Report on Form 10-Q and Item 8, Financial Statements and Supplementary Data, of the Annual Report on Form 10-K for the year ended December 31, 2018.

Our website can be found at www.trillionenergy.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed with or furnished to the U.S. Securities and Exchange Commission ("SEC"), pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 ("Exchange Act"), can be accessed free of charge by linking directly from our website under the "Investor Relations - SEC Filings" caption to the SEC's Edgar Database.



Executive Summary


Trillion Energy is a U.S. based oil and gas exploration and production company focused on expanding its portfolio of projects in Southeast Europe, Turkey, and countries in the immediate vicinity. The Company's concentration is on recently acquired oil and gas producing assets in Turkey and a coal bed methane exploration license in Bulgaria.

On January 11, 2019, the Company filed a preliminary non-offering prospectus with the British Columbia Securities Commission ("BCSC"). The prospectus is being filed in accordance with the provisions of Canadian National Instrument 41-101 - General Prospectus Requirements to qualify the distribution of the Company's common shares in Canada. No new securities are being registered for offer. Concurrently with the filing, the Corporation is making an application to list the Corporation's common shares on the Canadian Securities Exchange. The listing is subject to a number of conditions, including the filing of, and acceptance by, a final non-offering prospectus with the BCSC, and acceptance and approval by the Canadian Securities Exchange.

Effective April 1, 2019, the Company changed its name from Park Place Energy Inc. (OTC: PKPL) to Trillion Energy International Inc. (OTC: TCFF). The Company's new CUSIP is 89621V103.



Turkey

On January 18, 2017, the Company completed the acquisition of three oil and natural gas producing fields in Turkey. The purchase price for the acquisition of the Trillion Energy Turkey Companies from Tiway Oil B.V. was $2.1 million. At March 31, 2019 net production from these fields was around 199.52 boepd (barrel of oil equivalent per day).

The primary asset of the Trillion Energy Turkey Companies is the Cendere onshore oil field, which is a profitable oil field located in South East Turkey having a total of 25 wells. The Cendere Field was first discovered in 1988. Oil production commenced during 1990. The operator of the Cendere Field is TPAO. The Company's interest is 19.6% for all wells except for wells C-13, C-15 and C-16, for which its interest is 9.8%. The produced oil has a gravity of 27.5o API. After the initial development of the Cendere Field, oil production was approximately 2,000 bopd from three wells and which peaked at approximately 7,000 bopd in 1992, when additional wells were put into production. The field started to produce water during the first year of production. As of May 1, 2019, 20.3MMbbls of oil have been produced from the Cendere Field. During April 2019, the Company's average net oil was 128.17 bopd at 96% water cut.

A description of the Cendere Field geological and reservoir characteristics is as follows. The reservoirs are located in the South East Anatolian Basin and within the Middle Cretaceous period. The carbonated Derdere Formation is the main reservoir in Cendere Field and has dolomitization and fracturing which enhance its production characteristics. There are also four additional oil reservoirs contained within Cendere Field.

The Cendere Field is covered by 54 km2 of 3D seismic that was acquired in 2004.

The field was developed using a collection of dispersed oil wells from which production is collected and exported to the Cendere gathering station. The produced oil is exported to the TPAO Karakus processing facility which then is transported onwards to the BOTAS-operated oil pipeline.

There are 20 well pads which currently house 16 producing wells spread over an area of approximately 15 square kilometers. A field gathering station, located to the southwest of the Cendere Field collects the oil and produced water from a collection of flowlines and manifolds.



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The Cendere Field is a long term low decline oil reserve. The Company has a 19.6% interest in the Cendere oil field located in Southeast Turkey. This mature oilfield consistently produces between 110 and 123 bopd (barrels oil per day) net to the Company.

At March 31, 2019, the gross oil production rate for the producing wells in Cendre was 142 bbls/day; the average daily 2018 gross production rate for the field was 770 bbls/day. As of May 2019, oil is currently sold at a price of approximately US$67 per barrel for a netback per barrel of approximately US$32. At year-end 2018, the Cendere field was producing 170 barrels of oil per day, net to the Trillion Energy Turkey Companies; and averaged 150 barrels per day during 2018 net to the Trillion Energy Turkey Companies.

The main producing asset was a 36.75% interest in an offshore gas development project called the South Akçakoca Sub-Basin (SASB). The Company further acquired from its partner Foinavon Energy Turkey Inc. 12.25% working interest in the same license for 1,500,000 shares of the Company and $275,000 on February 8, 2018 to have a total of 49%. This field has four offshore platforms connected to an onshore gas plant. On March 31, 2019, net gas production to the Company was around 427 Mcfd (thousand cubic feet per day) from six producing wells. The SASB field potentially holds significant upside.

At SASB, the Company plans to reprocess the 3D seismic to facilitate a potential future program of drilling to bring discovered undeveloped gas pools on to production.



Bulgaria

The Company entered into an exploration license over a 98,000 acre block in northeast Bulgaria in 2014. The overall five year and our first year work programs were approved by the Ministry of Environment ("MEW"), however, the MEW approval was appealed in an administrative proceeding. The administrative court remanded the matter to MEW in May 2017 for a determination by the MEW as to whether an ecological evaluation of the license area should be required. This matter was determined in 2017 and we are in the progress of obtaining an environmental report which will cost an estimated $100,000. Upon the license becoming effective our exploration program will commence in 2019 for a term of five (5) years.

We are required to post a bond (105,000 Euros) upon the 5 year license term commencement. The license period may be extended for up to 5 additional years and may then be converted into an exploitation concession, which can last for up to 35 years. The Company's initial 5 year commitment involves geological and geophysical exploration activities for the first 3 years followed by drilling at least 10,000 meters (approximately 32,800 feet) of new wellbore in years 4 and 5.




Strategic Focus



Oil and natural gas prices in Turkey and throughout Southeast Europe make this region highly attractive for oil and gas exploration and production. Most of the countries, including Turkey and Bulgaria, import nearly all of their oil and natural gas and consumption is projected to increase. Turkey also contains many opportunities for additional oil and coal bed methane production as well as enhanced oil and natural gas recovery from existing fields. The Company will evaluate these opportunities as they appear. The fiscal terms are highly attractive. In Turkey, there is a 20% corporate tax and a 12.5% royalty. In Bulgaria, the corporate tax rate is 10% and the royalties are on a sliding rate starting at 3.5% up to 13.5%.

The license area holds great attraction as a potential coal bed methane exploration project. The license area was extensively drilled for coal exploration from 1964 to 1990. It was determined that coal mining was not technically feasible. However, the coal exploration drilling provided us with an extensive database.




Results of Operations



The following summary of our results of operations should be read in conjunction with our unaudited consolidated financial statements for the periods ended March 31, 2019 and 2018 which are included herein.



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Revenue


Revenue increased from $964,022 to $1,024,784, growth of 6.3%, for the three months ended March 31, 2019. Revenue increased due to additional production relating to the acquisition of an additional 12.25% working interest in a producing gas property and increased oil prices per barrel.



Expenses


Our general and administrative expenses for the three months ended March 31, 2019 were $417,480 compared to $420,966 for the three months ended March 31, 2018. $160,702 in expenses were from the North American head office compared to $178,344 in the three months ended March 31, 2018, which resulted in a year over year decrease of $17,492. The decrease is mostly attributable to a decrease in general & administrative expenses in the North American operations; $56,150 was for consulting and management fees (2018 - $131,643) and $35,455 in audit and financial services (2018 - $22,142) and partially offset by increased legal and professional fees of $53,774 (2018 - $8,535). The decrease in general and administrative expenses was also partially offset by Turkey general and administrative expenses which accounted for $256,778 of the total general and administrative for 2019 compared to $242,722 for the three months ended March 31, 2018 resulting in a year over year increase of $14,056.

The Company incurred production expenses related to its Tiway operations of $658,453, depletion charges of $151,400, depreciation expense of $12,353 and accretion expense of $100,653 for the three months ended March 31, 2019 compared to production expenses of $711,621, depletion charges of $163,049, depreciation expense of $5,348 and accretion expense of $84,058 for the three months ended March 31, 2018. Production and depletion expenses decreased by $64,817 for the period due to a strengthening of the US dollar compared to the Turkish Lira. This was partially offset by an increase to accretion of asset retirement costs of $16,595 due to the increase in the cost base to the asset retirement obligation from the Foinovan interest acquisition and an increase to depreciation of $7,005 due to the transition to Topic 842 for lease assets and liabilities.




Other Income (Expense)



For the three months ended March 31, 2019, the Company recorded other income (expense) of $538 compared to other income (expense) of ($129,143) for the same period in 2018. This overall decrease in other (expense) was due to a $102,500 loss on debt settlement recorded in 2018.



Loss


Our net loss for the three months ended March 31, 2019 was $315,017 compared to $550,163 for the three months ended March 31, 2018. The decrease in overall net losses was a result of the factors as described above.

Liquidity and Capital Resources

The following table summarizes our liquidity position:



                              March 31, 2019       December 31, 2018
                               (Unaudited)
Cash                         $        317,378     $           795,520
Working capital deficiency           (198,653 )               (11,817 )
Total assets                        8,391,233               8,662,675
Total liabilities                   5,933,713               5,791,591
Stockholders' equity                2,457,520               2,871,084



Cash Used in Operating Activities

We used cash of $368,320 from operating activities for the three months ended March 31, 2019 compared to $180,160 for the three months ended March 31, 2019. The loss of $315,017 was offset by $274,968 in non-cash expenses for the three months ended March 31, 2019. An increase of $436,306 in receivables from the additional output associated with the increase in working interest and the increased revenue pushed operating outflows to $328,271. Accounts payable and accrued liabilities increased cash inflows by $30,439 which increased solely in the parent company's operations.



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Cash Flow from Investing Activities

Net cash used in investing activities for the three months ended March 31, 2019 was $31,048 compared to $309,515 in the comparative period due to the Company adding a further interest to the SASB field in the first quarter of 2018.

Cash Provided by Financing Activities

We have funded our business to date primarily from sales of our common stock through private placements and loans. During the three months ended March 31, 2019, we received net cash of $8,000 for stock subscriptions and $3,000 in proceeds from notes payable while repaying $3,200 in loans payable and operating lease payments of $5,264. During the three months ended March 31, 2018, we received net cash of $675,000 for stock subscriptions while repaying $92,520 in loans payable

Future Operating Requirements

Based on our current plan of operations, we estimate that we will require approximately $1.2 million to pursue our plan of operations over the next 12 months. We plan to spend approximately $350,000 on capital expenditures for ongoing redevelopment operations on the Turkish properties primarily for engineering and reports based on reprocessing of data. We also plan to improve our working capital deficit by paying off accounts payable. The operations in Turkey are self-sustaining and will generate net cash flow sufficient to fund in-country general and administrative expenses as well as a portion of our head office overhead. We will require approximately $250,000 for general and administrative expenses.

To reduce our current outstanding trade payables and indebtedness will require approximately $1.2 million; however, we may be able to negotiate terms that will require a lesser amount.

Our current plan of operations in the period 12 months from now contemplates reprocessing of data. Subject to the outcome of reprocessing, our plan for 12- 24 months is the drilling of up to four (4) new wells at SASB. Depending on the timing of the drilling operations at our current interest (currently 49%), we project we will incur up to an additional $16 million in capital expenditures to enable us to conduct such operations.

As of March 31, 2019, the Company had unrestricted cash of $317,378. The Company is attempting to raise additional capital to fund future exploration and operating requirements.

Off-Balance Sheet Arrangements

On October 1, 2018 the Company entered into an agreement to grant to a consultant of the Company a 2% (two percent) gross overriding royalty on petroleum substances produced from certain of its currently undeveloped exploration properties, namely: Block 1-11 Vranino situated in Dobrich District, Bulgaria and seven contiguous exploration licences in the province of Hakkari Yuksekova Semdiali Derecik, Turkey. The Grant of the royalty agreement was for services involving technical and corporate advisory services.

On October 1, 2018 the Company entered into an agreement to grant to the CEO of the Company a 0.5% (one half of one percent) gross overriding royalty on petroleum substances produced from certain of its currently undeveloped exploration properties, namely: Block 1-11 Vranino situated in Dobrich District, Bulgaria and seven contiguous exploration licences in the province of Hakkari Yuksekova Semdiali Derecik, Turkey. The Grant of the royalty agreement was for services involving technical and corporate advisory services.



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Forward-Looking Information


Certain statements in this Quarterly Report on Form 10-Q constitute "forward-looking statements" within the meaning of applicable U.S. securities legislation. Additionally, forward-looking statements may be made orally or in press releases, conferences, reports, on our website or otherwise, in the future, by us or on our behalf. Such statements are generally identifiable by the terminology used such as "plans," "expects," "estimates," "budgets," "intends," "anticipates," "believes," "projects," "indicates," "targets," "objective," "could," "should," "may" or other similar words.

By their very nature, forward-looking statements require us to make assumptions that may not materialize or that may not be accurate. Forward-looking statements are subject to known and unknown risks and uncertainties and other factors that may cause actual results, levels of activity and achievements to differ materially from those expressed or implied by such statements, including the factors discussed under Item 1A. Risk Factors in our most recent Annual Report on Form 10-K. Such factors include, but are not limited to, the following: fluctuations in and volatility of the market prices for oil and natural gas products; the ability to produce and transport oil and natural gas; the results of exploration and development drilling and related activities; global economic conditions, particularly in the countries in which we carry on business, especially economic slowdowns; actions by governmental authorities including increases in taxes, legislative and regulatory initiatives related to fracture stimulation activities, changes in environmental and other regulations, and renegotiations of contracts; political uncertainty, including actions by insurgent groups or other conflicts; the negotiation and closing of material contracts; future capital requirements and the availability of financing; estimates and economic assumptions used in connection with our acquisitions; risks associated with drilling, operating and decommissioning wells; actions of third-party co-owners of interests in properties in which we also own an interest; our ability to effectively integrate companies and properties that we acquire; our limited operating history; our history of operating losses; our lack of insurance coverage; and the other factors discussed in other documents that we file with or furnish to the U.S. Securities and Exchange Commission. The impact of any one factor on a particular forward-looking statement is not determinable with certainty as such factors are interdependent upon other factors and our course of action would depend upon our assessment of the future, considering all information then available. In that regard, any statements as to: future oil or natural gas production levels; capital expenditures; the allocation of capital expenditures to exploration and development activities; sources of funding for our capital expenditure programs; drilling of new wells; demand for oil and natural gas products; expenditures and allowances relating to environmental matters; dates by which certain areas will be developed or will come on-stream; expected finding and development costs; future production rates; ultimate recoverability of reserves, including the ability to convert probable and possible reserves to proved reserves; dates by which transactions are expected to close; future cash flows, uses of cash flows, collectability of receivables and availability of trade credit; expected operating costs; changes in any of the foregoing and other statements using forward-looking terminology are forward-looking statements, and there can be no assurance that the expectations conveyed by such forward-looking statements will, in fact, be realized.

Although we believe that the expectations conveyed by the forward-looking statements are reasonable based on information available to us on the date such forward-looking statements were made, no assurances can be given as to future results, levels of activity, achievements or financial condition.

Readers should not place undue reliance on any forward-looking statement and should recognize that the statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described above, as well as others not now anticipated. The foregoing statements are not exclusive and further information concerning us, including factors that potentially could materially affect our financial results, may emerge from time to time. We do not intend to update forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.

© Edgar Online, source Glimpses

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