##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended March 31, 2004
 or o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ________________ to ________________
Commission file number 000-30586
 IVANHOE ENERGY INC. (Exact name of registrant as specified in its charter)
 Yukon, Canada(State or other jurisdiction of
incorporation or organization)
    
    98-0372413(I.R.S. Employer
Identification No.)
 Suite 654  999 Canada Place
Vancouver, British Columbia, Canada
V6C 3E1 (Address of principal executive office)
 (604) 688-8323 (registrants telephone number, including area code)
 Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report:
Not Applicable Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes     þ
    
    No     o
 Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes     þ
    
    No     o
 The number of shares of the registrants capital stock outstanding as of March
31, 2004 was 168,739,911 Common Shares, no par value.




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TABLE OF CONTENTS PagePART I
    
    Financial InformationItem 1
    
    Financial StatementsUnaudited Consolidated Balance Sheets as at
March 31, 2004 and December 31, 2003 (restated)
    
    
    3Unaudited Consolidated Statements of Loss and Deficit
for the Three-Month Periods Ended March 31, 2004 and
March 31, 2003 (restated)
    
    
    4Unaudited Consolidated Statements of Cash Flow for the
Three-Month Periods Ended March 31, 2004 and March 31,
2003 (restated)
    
    
    5Notes to the Unaudited Consolidated Financial
Statements
    
    
    6Item 2
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    11Item 3
    
    Quantitative and Qualitative Disclosures About Market Risks
    
    
    16Item 4
    
    Controls and Procedures
    
    
    16PART II
    
    Other InformationItem 1
    
    Legal Proceedings
    
    
    17Item 2
    
    Changes in Securities and Use of Proceeds
    
    
    17Item 3
    
    Defaults Upon Senior Securities
    
    
    17Item 4
    
    Submission of Matters To a Vote of Securityholders
    
    
    17Item 5
    
    Other Information
    
    
    17Item 6
    
    Exhibits and Reports on Form 8-K
    
    
    17
 2




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Part I  Financial Information 
 Item 1 Financial Statements 
 IVANHOE ENERGY INC.Unaudited Consolidated Balance Sheets
(stated in thousands of U.S. Dollars except share amounts) March 31, 2004
    
    December 31, 2003(restatedNotes 2 and 7)AssetsCurrent AssetsCash and cash equivalents
    
    $
    33,687
    
    
    $
    14,491Accounts receivable
    
    
    3,632
    
    
    
    2,720Other
    
    
    381
    
    
    
    40937,700
    
    
    
    17,620Long term assets
    
    
    1,566
    
    
    
    998Oil and gas properties, equipment and GTL investments, net
    
    
    96,907
    
    
    
    87,956$
    136,173
    
    
    $
    106,574Liabilities and Shareholders EquityCurrent LiabilitiesAccounts payable and accrued liabilities
    
    $
    4,212
    
    
    $
    4,516Advance payable
    
    
    10,000
    
    
    
    Note payable
 current portion
    
    
    250
    
    
    
    16714,462
    
    
    
    4,683Long term debt
    
    
    750
    
    
    
    833Asset retirement obligations
    
    
    564
    
    
    
    521Shareholders EquityShare capital, issued 168,739,911 common shares;
December 31, 2003 161,359,339 common shares
    
    
    181,989
    
    
    
    161,075Contributed surplus
    
    
    754
    
    
    
    516Deficit
    
    
    (62,346
    )
    
    
    (61,054
    )120,397
    
    
    
    100,537$
    136,173
    
    
    $
    106,574
 (See accompanying notes) 3




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IVANHOE ENERGY INC.
Unaudited Consolidated Statements of Loss and Deficit
Three Month Periods Ended March 31
(stated in thousands of U.S. Dollars except per share amounts) 2004
    
    2003(restatedNotes 2 and 7)RevenueOil and gas revenue
    
    $
    3,292
    
    
    $
    2,531Interest income
    
    
    40
    
    
    
    373,332
    
    
    
    2,568ExpensesOperating costs
    
    
    1,275
    
    
    
    898General and administrative
    
    
    1,903
    
    
    
    1,858Depletion and depreciation
    
    
    1,446
    
    
    
    9204,624
    
    
    
    3,676Net Loss
    
    
    1,292
    
    
    
    1,108Deficit, beginning of period, as previously reported
    
    
    60,267
    
    
    
    30,564Retroactive application of change in accounting policy for
stock based compensation
    
    
    787
    
    
    
    311Deficit, beginning of the period, as restated
    
    
    61,054
    
    
    
    30,875Deficit, end of period
    
    $
    62,346
    
    
    $
    31,983Net Loss per share  Basic and Diluted
    
    $
    0.01
    
    
    $
    0.01Weighted Average Number of Shares (in thousands)
    
    
    162,127
    
    
    
    144,534
 (See accompanying notes) 4




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IVANHOE ENERGY INC.
Unaudited Consolidated Statements of Cash Flow
Three Month Periods Ended March 31
(stated in thousands of U.S. Dollars) 2004
    
    2003(restatedNotes 2 and 7)Operating ActivitiesNet loss
    
    $
    (1,292
    )
    
    $
    (1,108
    )Items not requiring use of cashDepletion and depreciation
    
    
    1,446
    
    
    
    920Stock based compensation
    
    
    239
    
    
    
    110Changes in non-cash working capital items
    
    
    (841
    )
    
    
    547(448
    )
    
    
    469Investing ActivitiesCapital spending
    
    
    (10,423
    )
    
    
    (1,916
    )Deposit on investment
    
    
    (500
    )
    
    
    (10,923
    )
    
    
    (1,916
    )Financing ActivitiesShares issued on private placements, net of share issue costs
    
    
    20,428
    
    
    
    Shares issued on exercise of options
    
    
    139
    
    
    
    Proceeds from notes and advances
    
    
    10,000
    
    
    
    25030,567
    
    
    
    250Increase (decrease) in cash and cash equivalents, for the period
    
    
    19,196
    
    
    
    (1,197
    )Cash and cash equivalents, beginning of period
    
    
    14,491
    
    
    
    3,980Cash and cash equivalents, end of period
    
    $
    33,687
    
    
    $
    2,783Included in the above are the following:Taxes paid
    
    $
    3
    
    
    $
    6Interest paid
    
    $
    14
    
    
    $
    19Changes in non-cash working capital itemsAccounts receivable
    
    $
    (912
    )
    
    $
    (115
    )Other current assets
    
    
    28
    
    
    
    (64
    )Accounts payable and accrued liabilities
    
    
    43
    
    
    
    726$
    (841
    )
    
    $
    547
 (See accompanying notes) 5




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Notes to the Consolidated Financial Statements
March 31, 2004
(all tabular amounts are expressed in thousands of U.S. dollars except per share data)
(Unaudited)  1.
    
    BASIS OF PRESENTATION The Companys accounting policies are in accordance with accounting principles
generally accepted in Canada. These policies are consistent with accounting
principles generally accepted in the U.S., except as outlined in Note 12. The
unaudited consolidated financial statements have been prepared on a basis
consistent with the accounting principles and policies reflected in the
December 31, 2003 consolidated financial statements, except for a change in the
policy of accounting for stock based compensation which has been implemented
retroactively with a restatement of prior period financial statements, and
should be read in conjunction therewith. The December 31, 2003 consolidated
balance sheet, as restated, was derived from the audited consolidated financial
statements, but does not include all disclosures required by generally accepted
accounting principles (GAAP) in Canada and the U.S. In the opinion of
management, all adjustments (which included normal recurring adjustments)
necessary for the fair presentation for the interim periods have been made.
The results of operations and cash flows are not necessarily indicative of the
results for a full year. 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.  2.
    
    CHANGE IN ACCOUNTING POLICY Prior to January 1, 2004, the Company accounted for options granted to
employees and directors using the intrinsic-value of the options. Under this
method, compensation costs were not recognized in the financial statements for
share options granted at market value but rather disclosure was required, on a
pro forma basis, of the impact on net income of using the fair value at the
option grant date. The Company does, however, recognize compensation costs in
its financial statements for options granted to non-employees after January 1,
2002 based on the fair value of the options at the date granted. The Company
uses the Black-Scholes option pricing model for determining the fair value of
options issued at grant date. For fiscal years beginning on or after January 1, 2004, Canadian GAAP requires
compensation costs to be recognized in the financial statements using the fair
value based method of accounting for all stock options granted after January 1,
2002. Implementation of this change in accounting policy requires retroactive
application with the option of restating financial statements of prior periods. Accordingly, effective January 1, 2004, the Company changed its accounting
policy, for Canadian GAAP purposes, to recognize compensation costs using the
fair value based method of accounting for stock options granted to employees
and directors after January 1, 2002. This change has been adopted retroactively
and the Company has elected to restate the financial statements of prior
periods (See Note 7).  3.
    
    OIL AND GAS PROPERTIES Oil and gas properties, equipment and gas-to-liquids (GTL) investments are
net of accumulated depletion and depreciation of $11.9 million and $10.5
million as well as a provision for impairment of oil and gas properties of
$34.0 million as at March 31, 2004 and December 31, 2003, respectively. 6




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In January 2004, the Company signed farm-out and joint operating agreements
with Richfirst Holdings Limited (Richfirst), a wholly-owned subsidiary of
China International Trust & Investment Company to jointly develop the Dagang
oil project. Richfirst will acquire a 40% working interest in the project
following Chinese regulatory approvals and an up-front payment of $20.0
million. Richfirst advanced $10.0 million of the up-front payment (see Note 9)
but as at March 31, 2004 final regulatory approvals had not been received. In February 2004, the Company farmed into the Knights Landing project, which is
a 14,000-acre block located in the Sutter and Yolo counties, in northern
California. Under this exploration and development farm-in agreement, the
Company purchased, for $1.0 million, a 50% non-operated interest in four recent
discoveries in the contract area and agreed to fund, for $0.6 million, gas
gathering, surface treatment facilities and meters to connect the four wells to
an existing pipeline system.  4.
    
    LONG TERM ASSETS In January 2004, the Company signed a Stock Purchase and Shareholders
Agreement with Ensyn Group Inc. (Ensyn Group) and its subsidiary, Ensyn
Petroleum International Ltd. (Ensyn), pursuant to which the Company acquired
a 10% equity interest in Ensyn and exclusive rights to use the proprietary
Ensyn RTPTM Process in several key international markets. The Company will pay
$2.0 million and grant Ensyn rights to acquire equity interests in the
Companys international oil development projects that use the Ensyn RTPTM
Process. The purchase price for the 10% equity interest in Ensyn will be paid
in four equal installments and completion of the acquisition is subject to the
attainment of specific milestones: (1) upon signing the heads of agreement, (2)
upon signing the Stock Purchase and Shareholders Agreement, (3) upon Ensyn
delivering a commercial demonstration facility to California and (4) upon
confirmation of the economic viability of the Ensyn RTPTM Process from the
commercial demonstration facility. The first two milestone payments totaling
$1.0 million are included in long-term assets (See Note 11).  5.
    
    SEGMENT INFORMATION The following tables present the Companys interim segment information for the
three-month periods ended March 31, 2004 and 2003 and identifiable assets as at
March 31, 2004 and December 31, 2003: 2004
    
    2003(restated Notes 2 and 7)U.S.
    
    China
    
    Total
    
    U.S.
    
    China
    
    TotalOil and gas revenue
    
    $
    1,793
    
    
    $
    1,499
    
    
    $
    3,292
    
    
    $
    1,441
    
    
    $
    1,090
    
    
    $
    2,531Interest income
    
    
    40
    
    
    
    
    
    
    
    40
    
    
    
    37
    
    
    
    
    
    
    
    371,833
    
    
    
    1,499
    
    
    
    3,332
    
    
    
    1,478
    
    
    
    1,090
    
    
    
    2,568Operating costs
    
    
    755
    
    
    
    520
    
    
    
    1,275
    
    
    
    503
    
    
    
    395
    
    
    
    898Depletion and depreciation
    
    
    871
    
    
    
    575
    
    
    
    1,446
    
    
    
    565
    
    
    
    355
    
    
    
    9201,626
    
    
    
    1,095
    
    
    
    2,721
    
    
    
    1,068
    
    
    
    750
    
    
    
    1,818Segment income before the following
    
    $
    207
    
    
    $
    404
    
    
    
    611
    
    
    $
    410
    
    
    $
    340
    
    
    
    750General and administrative
    
    
    
    
    
    
    
    
    
    
    1,903
    
    
    
    
    
    
    
    
    
    
    
    1,858Net loss
    
    
    
    
    
    
    
    
    
    $
    1,292
    
    
    
    
    
    
    
    
    
    
    $
    1,108
 U.S.
    
    China
    
    Total
    
    U.S.
    
    China
    
    TotalCapital expenditures:Oil and gas
    
    $
    3,118
    
    
    $
    6,875
    
    
    $
    9,993
    
    
    $
    1,113
    
    
    $
    593
    
    
    $
    1,706Gas-to-liquids
    
    
    
    
    
    
    
    
    
    
    430
    
    
    
    
    
    
    
    
    
    
    
    210$
    10,423
    
    
    
    
    
    
    
    
    
    
    $
    1,916
 7




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As at March 31, 2004
    
    As at December 31, 2003Identifiable Assets:Oil & gas
    
    $
    82,517
    
    
    $
    38,798
    
    
    $
    121,315
    
    
    $
    61,379
    
    
    $
    30,766
    
    
    $
    92,145Gas-to-liquids
    
    
    
    
    
    
    
    
    
    
    14,858
    
    
    
    
    
    
    
    
    
    
    
    14,429$
    136,173
    
    
    
    
    
    
    
    
    
    
    $
    106,574
  6.
    SHARE CAPITAL Following is a summary of the changes in share capital and stock options
outstanding for the three-month period ended March 31, 2004: Common Shares
    
    Stock OptionsWeightedAverageExerciseNumber
    
    
    
    
    
    Number
    
    Price(thousands)
    
    Amount
    
    (thousands)
    
    Cdn.$(restated Notes 2 and 7)Balance December 31, 2003, as previously reported
    
    
    161,359
    
    
    $
    160,804
    
    
    
    8,949
    
    
    $
    2.64Retroactive application of change in accounting
policy for stock based compensation
    
    
    
    
    
    
    271
    
    
    
    
    
    
    
    Balance December 31, 2003, as restated
    
    
    161,359
    
    
    
    161,075
    
    
    
    8,949
    
    
    $
    2.64Shares issued on private placements, net of share
issue costs
    
    
    7,173
    
    
    
    20,428
    
    
    
    
    
    
    
    Shares issued on exercise of options
    
    
    50
    
    
    
    139
    
    
    
    (50
    )
    
    $
    3.60Shares issued for services
    
    
    158
    
    
    
    347
    
    
    
    
    
    
    
    Balance March 31, 2004
    
    
    168,740
    
    
    $
    181,989
    
    
    
    8,899
    
    
    $
    2.64
 During the three-month period ended March 31, 2004, the Company closed two
special warrant financings to advance its international and North American oil
and gas operations and for general corporate purposes. The financings consist
of 7,172,414 special warrants at $2.90 per special warrant. Each special
warrant entitles the holder to acquire one common share and one common-share
purchase warrant at no additional cost. Two common-share purchase warrants are
exercisable to purchase an additional common share at $3.00 at any time on or
prior to the first anniversary date following the special warrant date of issue
and at $3.20 thereafter until the second anniversary date of the special
warrant date of issue. The net proceeds from the special warrant financings
have been apportioned to the common shares. No amounts have been apportioned to
the purchase warrants. The following common-share purchase warrants are outstanding and exercisable as
at March 31, 2004: First Anniversary
    
    Second AnniversaryRemainingNumber of
    
    Number of
    
    
    
    
    
    Price per
    
    
    
    
    
    Price perPurchase
    
    Common
    
    
    
    
    
    Share
    
    
    
    
    
    ShareWarrants
    
    Shares
    
    Date
    
    (US$)
    
    Date
    
    (US$)(thousands)3,000
    
    
    1,500
    
    
    July 3, 2004
    
    $
    1.00
    
    
    July 3, 2005
    
    $
    1.103,000
    
    
    1,500
    
    
    August 18, 2004
    
    $
    1.00
    
    
    August 18, 2005
    
    $
    1.103,029
    
    
    1,515
    
    
    August 21, 2004
    
    $
    1.70
    
    
    August 21, 2005
    
    $
    1.871,250
    
    
    1,250
    
    
    October 31, 2004
    
    $
    4.00
    
    
    October 31, 2005
    
    $
    4.305,448
    
    
    2,724
    
    
    February 18, 2005
    
    $
    3.00
    
    
    February 18, 2006
    
    $
    3.201,724
    
    
    862
    
    
    March 5, 2005
    
    $
    3.00
    
    
    March 5, 2006
    
    $
    3.2017,451
    
    
    9,351
 8




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7.
    STOCK BASED COMPENSATION The Company accounts for all stock options granted using the fair value based
method of accounting, which it adopted retroactively effective January 1, 2004
for stock options granted to employees and directors after January 1, 2002.
Under this method, compensation costs are recognized in the financial
statements over the options vesting period using an option- pricing model for
determining the fair value of the options at the grant date. The effect of the accounting change on the net loss for the three-month period
ended March 31, 2004 and on the net loss for the three-month period ended March
31, 2003, as previously reported, was an increase of $0.2 million and $0.1
million, respectively. There is negligible effect on the net loss per share for
either period. The deficit as at the beginning of the three month periods ended
March 31, 2004 and 2003 has increased $0.8 million and $0.3 million,
respectively, to reflect the retroactive adoption of the fair value based
method of accounting for stock options granted to employees and directors after
January 1, 2002. Additionally, 0.3 million options granted to employees and
directors after January 1, 2002 were exercised during the third and fourth
quarters of 2003 resulting in a $0.3 million increase in share capital as at
December 31, 2003 with a corresponding reduction in contributed surplus. The increases resulting from the foregoing change in accounting principle were
calculated in accordance with the Black-Scholes option pricing model, using the
following data and assumptions: 72% to 100% price volatility, using the prior
two years weekly average prices of the Companys common shares; expected
dividend yield of 0%; option terms to expiry of 5 years, as defined by the
option agreements; risk-free rate of return as of the date of the grant of 4.1%
to 5.6%, based on five year Canada Bond yields.  8.
    NOTES PAYABLE In February 2003, the Company obtained a bank facility for up to $5.0 million
to drill 30 new oil wells and upgrade surface transmission and steam injection
facilities in the southern expansion of South Midway. Interest only is payable
until July 15, 2004 at 0.25% above the banks prime rate or 2.75% over the
London Inter-Bank Offered Rate (LIBOR), at the option of the Company. After
July 15, 2004, the loan is repayable over three years plus interest at 0.50%
above the banks prime rate or 3.0% over LIBOR, at the option of the Company.
The loan is secured by all the Companys rights and interests in the South
Midway properties. The loan balance as at March 31, 2004 is $1.0 million with a
three-month fixed LIBOR rate of 3.875%.  9.
    ADVANCE PAYABLE In March 2004, the Company received a $10.0 million advance as part of the
$20.0 million up-front payment due from Richfirst for their farm-in to the
Dagang oil project (See Note 3). The advance is repayable July 1, 2004 plus
accrued and unpaid interest at 5% per annum. Richfirst, at its option, may
elect to apply the advance against the $20.0 million up-front payment due to
the Company. If such election is made by Richfirst prior to closing the
farm-out agreement, which includes receiving Chinese regulatory approvals, the
Company will not be required to repay the advance nor the accrued and unpaid
interest on the advance and Richfirst would be entitled to 50% of its
participating interest share of production from the Dagang oil project from the
date of the advance.  10.
    ASSET RETIREMENT OBLIGATION The undiscounted amount of expected cash flows required to settle the Companys
asset retirement obligations is estimated at $1.0 million to be settled over a
twelve-year period 9




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starting in 2010. The liability for the expected cash flows, as reflected in
the financial statements, has been discounted at 5% to 7%.  11.
    SUBSEQUENT EVENT In April 2004, the Company signed an agreement with Ensyn Group and Ensyn
pursuant to which the Company advanced to Ensyn $1.0 million until July 31,
2004 at which time the Company may elect to take an additional 5% equity
interest in Ensyn or consider the advance as a loan to be repaid plus interest
over a period commencing on July 31, 2005.  12.
    ADDITIONAL DISCLOSURE REQUIRED UNDER U.S. GAAP The consolidated financial statements have been prepared in accordance with
Canadian GAAP, which conforms to U.S. GAAP except as below: Consolidated Balance Sheets As discussed under Stock Based Compensation in Note 7, the Company changed
its accounting policy, for Canadian GAAP, to recognize compensation costs using
the fair value based method of accounting for stock options granted to
employees and directors after January 1, 2002. For US GAAP, the Company
continues to apply APB Opinion No. 25, as interpreted by FASB Interpretation
No. 44, in accounting for its stock option plan and does not recognize
compensation costs in its financial statements for stock options issued to
employees and directors. Accordingly, for U.S. GAAP purposes, share capital
would be reduced by $0.3 million as at March 31, 2004 and December 31, 2003
related to the employees and directors exercise of options in the third and
fourth quarters of 2003; contributed surplus would be reduced by $0.7 million
and $0.5 million as at March 31, 2004 and December 31, 2003, respectively, for
stock options issued to employees and directors, but not yet exercised; and the
deficits as at March 31, 2004 and December 31, 2003 would be reduced by $1.0
million and $0.8 million, respectively, for the amount of stock based
compensation expense recognized for Canadian GAAP. The application of U.S. GAAP has the following effect on oil and gas properties
and shareholders equity: As at March 31, 2004
    
    As at December 31, 2003Oil and Gas
    
    Shareholders'
    
    Oil and Gas
    
    Shareholders'Properties
    
    Equity
    
    Properties
    
    EquityCanadian GAAP
    
    $
    96,907
    
    
    $
    120,397
    
    
    $
    87,956
    
    
    $
    100,537Adjustment to ascribed value of shares
issued for royalty interests
    
    
    1,358
    
    
    
    1,358
    
    
    
    1,358
    
    
    
    1,358Impairment provision for China properties, net
    
    
    (9,811
    )
    
    
    (9,811
    )
    
    
    (9,834
    )
    
    
    (9,834
    )GTL development costs written off
    
    
    (4,504
    )
    
    
    (4,504
    )
    
    
    (4,074
    )
    
    
    (4,074
    )Adjustment for change in accounting for
stock based compensation:Share capital
    
    
    
    
    
    
    (271
    )
    
    
    
    
    
    
    (271
    )Contributed surplus
    
    
    
    
    
    
    (745
    )
    
    
    
    
    
    
    (516
    )Deficit
    
    
    
    
    
    
    1,016
    
    
    
    
    
    
    
    787U.S. GAAP
    
    $
    83,950
    
    
    $
    107,440
    
    
    $
    75,406
    
    
    $
    87,987
 Under U.S. GAAP, the transfer of deficit to share capital, which occurred in
1999, would not be recognized and shareholders equity would be presented as
follows: 10




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##### 



March 31,
    
    December 31,2004
    
    2003Share capital (including adjustments above)
    
    $
    257,531
    
    
    $
    236,617Contributed surplus (non-employee stock based compensation)
    
    
    9
    
    
    
    Deficit (Including adjustments above)
    
    
    (150,100
    )
    
    
    (148,630
    )$
    107,440
    
    
    $
    87,987
 Consolidated Statements of Loss and Deficit The application of U.S. GAAP has the following effect on net loss and net loss
per share: Three-Month Periods Ended March 31,2004
    
    2003(restated Notes 2 and 7)Net
    
    Net Loss
    
    Net
    
    Net LossLoss
    
    Per Share
    
    Loss
    
    Per ShareCanadian GAAP
    
    $
    1,292
    
    
    $
    0.01
    
    
    $
    1,108
    
    
    $
    0.01Stock based compensation expense
    
    
    (229
    )
    
    
    
    
    
    
    (110
    )
    
    
    Depletion adjustment  China
    
    
    (23
    )
    
    
    
    
    
    
    (23
    )
    
    
    GTL development costs written off, net
    
    
    430
    
    
    
    
    
    
    
    210
    
    
    
    U.S. GAAP
    
    $
    1,470
    
    
    $
    0.01
    
    
    $
    1,185
    
    
    $
    0.01
 Stock Based Compensation Had compensation expense been determined based on the fair value of options
issued to employees and directors at the stock option grant date, including
those granted prior to January 1, 2002, consistent with the method of SFAS No.
123, Accounting for Stock-Based Compensation, the Companys net loss and net
loss per share would have been as follows: Three-Month PeriodsEnded March 31,2004
    
    2003Net loss under U.S. GAAP
    
    $
    1,470
    
    
    $
    1,185Stock-based compensation expense determined under the fair
value based method for employee and director awards
    
    
    494
    
    
    
    398Pro forma net loss under U.S. GAAP
    
    $
    1,964
    
    
    $
    1,583Basic loss per common share under U.S. GAAP:As reported
    
    $
    0.01
    
    
    $
    0.01Pro forma
    
    $
    0.01
    
    
    $
    0.01Weighted Average Number of Shares under U.S. GAAP (in thousands)
    
    
    162,127
    
    
    
    144,534
 
  Item 2.
    Managements Discussion and Analysis of Financial Condition
and Results of Operations Forward-Looking Statements With the exception of historical information, certain matters discussed in this
Form 10-Q are forward looking statements that involve risks and uncertainties.
Certain statements contained in this Form 10-Q, including statements which may
contain words such as could, should, expect, believe, will and
similar expressions and statements relating to matters that are not historical
facts are forward-looking statements. Such statements involve known and unknown
risks and uncertainties which may cause our actual results, performances or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Although
we believe that our
expectations are based on reasonable assumptions, we can give no assurance that
our goals will be achieved. Important factors that could cause actual results
to differ materially from 11




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##### 



those in the forward-looking statements herein
include, but are not limited to, our ability to raise capital as and when
required, the timing and extent of changes in prices for oil and gas,
competition, environmental risks, drilling and operating risks, uncertainties
about the estimates of reserves and the potential success of gas-to-liquids
development technology, the prices of goods and services, the availability of
drilling rigs and other support services, legislative and government
regulations, political and economic factors in countries in which we operate
and implementation of our capital investment program. The following should be read in conjunction with the Companys consolidated
financial statements contained herein and in the Form 10-K for the year ended
December 31, 2003, along with Managements Discussion and Analysis of Financial
Condition and Results of Operations contained in such Form 10-K. Any terms
used but not defined in the following discussion have the same meaning given to
them in the Form 10-K. Results of Operations For the three-month period ended March 31, 2004, the net loss was $1.3 million
($0.01 per share) compared to a net loss of $1.1 million ($0.01 per share) for
the same period in 2003. Cash from operating activities for the three-month
period ended March 31, 2004 was a $0.4 million deficit compared to cash from
operating activities of $0.5 million for the same period in 2003 due mainly to
a higher usage of working capital in the first three months of 2004. Our cash
position increased $19.2 million for the first three months of 2004 primarily
due to net proceeds received from private placements of $20.4 million and a
$10.0 million advance from Richfirst for the Dagang oil project development
program. This is partially offset by $10.4 million of capital spending for the
first three months of 2004 and $0.5 million for the second milestone payment
for the acquisition of Ensyn. Our cash position decreased $1.2 million for the
comparable period in 2003 primarily due to $1.9 million of capital spending
partially offset by $0.5 million in cash from operating activities and a $0.25
million loan from a related party. Production and Operations Oil and gas revenues for the three-month period ended March 31, 2004 were $3.3
million. This represents an increase of $0.8 million from the comparable period
in 2003. Revenues in China increased 37% or $0.4 million due mainly to a 36%
increase in production as a result of initiating the development drilling
program in Dagang at the end of 2003 and an increase in production from the
Daqing project development program initiated in April 2003, in which we own a
royalty interest. In February 2004, we placed one newly completed Dagang well
on production at initial rates of 234 net bopd. Revenues from the U.S.
operations increased 24% or $0.4 million due mainly to a $4.97/boe increase in
oil and gas prices and a 4% increase in production due mainly to a start-up of
operations in our Citrus and Sledge Hamar fields during the three-month period
ended March 31, 2004. This increase in production is partially offset by a
decrease in production from our Spraberry field as a result of a natural
decline as the field matures. Operating costs increased 28% or $1.82 per boe for the three-month period ended
March 31, 2004 compared to the same period in 2003. Operating costs in China
increased 4% or $0.31 per boe for the first three months of 2004 due mainly to
the shut in of wells for workovers. Operating costs in the U.S. increased 49%
or $3.01 per boe for the first three months of 2004 due mainly to an increase
in costs incurred for the cyclic steam operations in the southern expansion of
South Midway. To contain costs at South Midway we have scaled back on the
number of steam generators in use and have modified the steaming operations
such that we are able to steam two wells at once with the same steam generator. Our depletion rate increased 31% or $3.11 per boe for the three-month period
ended March 31, 2004 compared to the same period in 2003. The depletion rate in
China increased 19% or 12




---



##### 



$1.85 per boe for the first three months of 2004 due
mainly to anticipated increases in Dagang future development costs. The
depletion rate in the U.S. increased 42% or $4.24 per boe for the first three
months of 2004 due mainly to an increase in the carrying costs of our evaluated
U.S. oil and gas assets during the fourth quarter of 2003 primarily in
Northwest Lost Hills, East Texas and North South Forty. Production and operating information are detailed below: Three-Month Periods
Ended March 31,2004
    
    2003U.S.
    
    China
    
    Total
    
    U.S.
    
    China
    
    TotalNet Production:BOE
    
    
    58,366
    
    
    
    50,362
    
    
    
    108,728
    
    
    
    55,979
    
    
    
    37,060
    
    
    
    93,039BOE/day for the year
    
    
    641
    
    
    
    553
    
    
    
    1,195
    
    
    
    622
    
    
    
    412
    
    
    
    1,034
 Per BOE
    
    Per BOEOil and gas revenue
    
    $
    30.71
    
    
    $
    29.76
    
    
    $
    30.27
    
    
    $
    25.74
    
    
    $
    29.42
    
    
    $
    27.21Operating costs
    
    
    9.18
    
    
    
    7.38
    
    
    
    8.35
    
    
    
    6.17
    
    
    
    7.07
    
    
    
    6.53Production taxes
    
    
    1.18
    
    
    
    
    
    
    
    0.63
    
    
    
    0.93
    
    
    
    
    
    
    
    0.56Engineering support
    
    
    2.57
    
    
    
    2.94
    
    
    
    2.74
    
    
    
    1.88
    
    
    
    3.59
    
    
    
    2.5612.93
    
    
    
    10.32
    
    
    
    11.72
    
    
    
    8.98
    
    
    
    10.66
    
    
    
    9.65Net Revenue before depletion
    
    
    17.78
    
    
    
    19.44
    
    
    
    18.55
    
    
    
    16.76
    
    
    
    18.76
    
    
    
    17.56Depletion
    
    
    14.33
    
    
    
    11.43
    
    
    
    12.99
    
    
    
    10.09
    
    
    
    9.58
    
    
    
    9.88Net Revenue from operations
    
    $
    3.45
    
    
    $
    8.01
    
    
    $
    5.56
    
    
    $
    6.67
    
    
    $
    9.18
    
    
    $
    7.68
 Exploration and Development Activities Capital spending on exploration and development activities for the three-month
period ended March 31, 2004 was $9.9 million, an increase of $8.2 million from
the amount spent during the comparable period in 2003. This increase is mainly
due to the initiation of our Dagang development drilling and Zitong seismic
programs in China and the farm-in to the Knights Landing and LAK Ranch projects
and completion of our first Citrus well in the U.S. Capital spending at Dagang increased $3.8 million during the first three months
of 2004 compared to the same period in 2003. We completed drilling of two
development wells at the end of the first quarter of 2004 and had spud a third
well. One of the completed wells was placed on production in February 2004 and
the second well is being evaluated. We plan to drill an additional 15 wells
over the balance of 2004. Over the next three years, we expect to drill 115 new
wells and work over 28 existing wells. During the first three months of 2004 we commenced the first phase of our
1,100-kilometer seismic acquisition program in the Zitong project, which
increased our capital spending in the first quarter of 2004 by $2.5 million
compared to the same period in 2003. After interpretation of the seismic we
plan to drill one exploration well in late 2004. We farmed-in to the Knights Landing gas project in northern California in
February 2004 which resulted in a $1.5 million increase in our capital spending
in the first three months of 2004 compared to the same period in 2003. We
acquired a non-operated interest in four recent gas discovery wells in the
contract area and agreed to fund the cost of a gas gathering, surface treatment
facilities and meters to connect the four wells to an existing pipeline system.
We hold a 50% working interest in the 14,000-acre project and expect to have
the initial pipeline connections to the four gas wells completed, operational
and producing by late April 2004. In early May 2004, the first 10-well drilling
program is expected to commence with the drilling of three exploration wells
and seven development wells. As a follow up to the initial drilling, we
may commence a second drilling campaign of up to an additional 10 wells in the
second half of 2004. 13




---



##### 



In January 2004, we farmed-in to the LAK Ranch field, a thermal
recovery/horizontal well oil project in Weston County, Wyoming. We began
initial preparations for pilot-phase operations, which resulted in a $0.5
million increase in our capital spending in the first three months of 2004
compared to the same period in 2003. During the pilot phase, we will have an
initial 30% working interest. The plan is to steam and produce an existing
horizontal well and drill five additional steam injection wells to provide
continuous steam to the reservoir in order to increase production from the
horizontal well. We also plan a high-resolution 3-D seismic data acquisition
program as part of the pilot phase to further identify the limits of the field.
Should we decide to enter the next two phases of the contract, our working
interest will increase to a maximum of 60%. We completed our first producing well, Citrus #1, in the first three months of
2004 resulting in a $0.8 million increase in our capital spending in the first
three months of 2004 compared to the same period in 2003. Two additional wells
are planned for the second quarter of 2004. The wells are expected to be
drilled to a depth of approximately 8,700 feet and will test multiple producing
zones in the offsetting area. If the initial three wells are successful,
additional wells may be drilled on the 2,600-acre block in which we have an 83%
working interest. Capital spending in South Midway decreased $0.4 million during the first three
months of 2004 compared to the same period in 2003 due mainly to the completion
of our first phase of the southern expansion in the third quarter of 2003. We
have 51 producing wells in South Midway, with a working interest of 100%. Our
plan is to drill six development and two exploration wells in the second
quarter of 2004, which will be funded by the remainder of our $5.0 million
credit facility with Wells Fargo Bank. Our capital spending program for the remainder of 2004 also includes additional
Sledge Hamar and North South Forty wells in the San Joaquin Valley of
California and Malakoff and Catfish Creek wells in East Texas as follows: We have one producing discovery well, Sledge Hamar 1-7, with a working interest
of 40%. The first of our six planned wells, the Sledge Hamar 2-7, will commence
drilling in April 2004 and test the Stevens interval that produces in the 1-7
well. We plan to drill follow-up wells later in 2004 to define the extent and
productivity of additional oil zones that were encountered, but not tested, in
the discovery well. We hold a 50% working interest in three prospects that have been defined within
the North South Forty prospect as a result of an extensive 3-D seismic
acquisition program conducted in 2000 on lands west of the Belridge oil field.
Three exploration wells are planned for the summer of 2004. Two of the wells
are planned to be drilled to a depth of 1,500 feet and one is planned to be
drilled to a depth of 3,500 feet. In East Texas, we plan to drill one well each in the Malakoff and Catfish Creek
prospects under a farm-out agreement in which we have a 25% carried interest.
The Malakoff well is planned to be drilled to a depth of 8,700 feet and the
Catfish Creek well to a depth of 11,000 feet. Gas-to-Liquids Activities Spending on GTL projects for the three-month period ended March 31, 2004 was
$0.4 million an increase of $0.2 million from the amounts spent during the
comparable period in 2003. In Egypt, we await the approval of our scope of work for a commercialization
study and the completion of a heads of agreement authorizing the
commercialization study and setting aside 14




---



##### 



sufficient natural gas reserves for a 45,000-barrels per day GTL plant. The
government of Egypt, and its agencies responsible for the development and
monetization of its natural gas reserves, continue to review our proposals. We have completed the initial phase of the commercialization study for the GTL
plant in Bolivia. The results indicate that under the current tax regulations
pertaining to the Bolivian hydrocarbon sector, a 90,000 barrel-per-day GTL
plant could be commercial in the southern region of Bolivia. However, given
the current political climate and the uncertainty surrounding the impact newly
proposed tax regulations could have on the viability of a GTL plant, we, and
our partners in the commercialization study, have elected not to proceed any
further until all hydrocarbon legislation has been finalized. Liquidity and Capital Resources As at March 31, 2004, our cash position was $33.7 million as a result of
closing two special warrant financings in the first quarter of 2004, which
generated net proceeds of $20.4 million, and a $10.0 million advance from
Richfirst towards their $20.0 million acquisition of a 40% working interest in
the Dagang oil project. Following Chinese regulatory approval of the farm-out
agreement, Richfirst will be required to pay the remaining $10.0 million.
Additionally, we plan to draw down the $4.0 million balance of our $5.0 million
credit facility with Wells Fargo Bank by July 15, 2004. The budget for our capital program, for the remainder of 2004, is estimated to
be $42 million. Our current cash position, expected cash flows, bank credit
facility and funding from third-party agreements will enable us to achieve our
2004 capital program. We continue to pursue acquisitions of proven and probable
reserves and technologies that enhance the recovery of oil and gas reserves as
a means of supplementing our growth strategy. However, to complete the
development of our fields and to execute our medium and long-term growth
strategies we will require additional funding. We plan to seek such financing
through a combination of equity, convertible debentures, debt, mezzanine
financing and joint venture partner participation. We cannot assure you that we
will be successful in raising the additional funds necessary or securing joint
venture partners to complete our expansion and capital programs. If we are
unsuccessful, we will have to prioritize such programs, which may result in
delaying and potentially losing some valuable business opportunities. Contractual Obligations The table below summarizes the contractual obligations that are reflected in
our Unaudited Consolidated Balance Sheet as at March 31, 2004 and/or disclosed
in the accompanying Notes: 15




---



##### 



Payments Due by YearTotal
    
    2004
    
    2005
    
    2006
    
    2007
    
    After 2007Purchase Agreements:
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Consolidated Balance Sheets:Note payable  current portion (Note 8)
    
    
    167
    
    
    
    167
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long term debt (Note 8)
    
    
    833
    
    
    
    
    
    
    
    333
    
    
    
    333
    
    
    
    167
    
    
    
    Advance payable (Note 9)
    
    
    10,000
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Commitments:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    1,198
    
    
    
    399
    
    
    
    442
    
    
    
    306
    
    
    
    51
    
    
    
    Exploration commitment (a)
    
    
    14,000
    
    
    
    4,700
    
    
    
    9,300
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    26,198
    
    
    $
    15,266
    
    
    $
    10,075
    
    
    $
    639
    
    
    $
    218
    
    
    $
    
   (a)
    
    This represents our estimate of the remaining expenditure commitment for the minimum work program during the first phase of
Zitong. This is a total spending commitment and not a commitment per
year. The amounts per year are based on our current estimate. Off Balance Sheet Arrangements As at March 31, 2004 and December 31, 2003, we did not have any relationships
with unconsolidated entities or financial partnerships, such as structured
finance or special purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. In addition, we do not engage in trading activities
involving non-exchange traded contracts. As such, we are not materially exposed
to any financing, liquidity, market or credit risk that could arise if we had
engaged in such relationships. We do not have relationships and transactions
with persons or entities that derive benefits from their non-independent
relationship with us, or our related parties, except as disclosed herein. Outstanding Share Data As of April 30, 2004, there were 169,289,911 common shares of the Company
issued and outstanding, 17,451,826 share purchase warrants outstanding and
exercisable to purchase 9,350,913 common shares and incentive stock options
outstanding to purchase 8,348,664 common shares. 
  Item 3.
    Quantitative and Qualitative Disclosures About Market Risk No material changes since December 31, 2003.  Item 4.
    Controls and Procedures The Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys CEO and CFO,
of the effectiveness of the design and operation of the Companys disclosure
controls and procedures pursuant to the Securities Exchange Act of 1934. Based
upon that evaluation, the CEO and CFO concluded that, as of March 31, 2004, the
Companys disclosure controls and procedures are effective in timely alerting
them to material information required to be included in the Companys periodic
SEC filings relating to the Company (including its consolidated subsidiaries).
There were no significant changes in the Companys internal control over
financial reporting or in other factors that could significantly affect its
internal control over financial reporting during the period ended March 31,
2004 nor any significant deficiencies or material weaknesses in such internal
control over financial reporting requiring corrective actions. As a result, no
corrective actions were taken. 16




---



##### 



Part II  Other Information 
  Item 1.
    Legal Proceedings: None 
  Item 2.
    Changes in Securities and Use of Proceeds: During the three months ended March 31, 2004, we issued securities which were
not registered under the Securities Act of 1933 (the Act) as follows:  
    
    in February 2004, we issued a total of 5,448,276 special warrants
at a price of $2.90 per special warrant to Australian and Bahamian
institutional investors in transactions exempt from registration under
Rule 903 of the Act. Each special warrant was exercisable to acquire,
for no additional considerations one common share and one share
purchase warrant following the issuance of a receipt for a prospectus
by applicable Canadian securities regulatory authorities, which
occurred in March 2004; and  
    
    in March 2004, we issued 1,724,138 special warrants at a price of
$2.90 per special warrant to a Bahamian institutional investor in a
transaction exempt from registration under Rule 903 of the Act. Each
special warrant was exercisable to acquire, for no additional
considerations one common share and one share purchase warrant
following the issuance of a receipt for a prospectus by applicable
Canadian securities regulatory authorities, which occurred in March
2004. 
  Item 3.
    Defaults Upon Senior Securities: None 
  Item 4.
    Submission of Matters To a Vote of Securityholders: None 
  Item 5.
    Other Information: None 
  Item 6.
    Exhibits and Reports on Form 8-K  (a)
    
    Exhibits EXHIBITNUMBER
    
    DESCRIPTION10.1
    
    Loan Agreement between Pan-China Resources Ltd. and Richfirst Holdings
Limited dated March 1, 200410.2
    
    Letter of Guarantee for Dagang Facility by Ivanhoe Energy Inc. for Loan
Agreement between Pan-China Resources Ltd. and Richfirst Holdings Limited
Pan dated March 1, 200431.1
    
    Certification by the Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 200231.2
    
    Certification by the Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 200232.1
    
    Certification by the Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 200232.2
    
    Certification by the Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
  (b)
    
    Reports on Form 8-K.None 17




---



##### 



SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized. IVANHOE ENERGY INC. By:
    
    /s/ W. Gordon Lancaster
Name:  W. Gordon Lancaster
Title:    Chief Financial Officer
 Dated: May 07, 2004 18




---



##### 



INDEX TO EXHIBITS ExhibitNumber
    
    Description10.1
    
    Loan Agreement between Pan-China Resources Ltd. and Richfirst
Holdings Limited dated March 1, 200410.2
    
    Letter of Guarantee for Dagang Facility by Ivanhoe Energy Inc. for
Loan Agreement between Pan-China Resources Ltd. and Richfirst Holdings
Limited Pan dated March 1, 200431.1
    
    Certification by the Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification by the Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification by the Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification by the Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
 19