CALGARY, Aug. 13 /CNW/ - Galleon Energy Inc. ("Galleon") announces strong
financial results and continued success in the drilling program focused on
light oil and natural gas resource projects.
Second Quarter 2008 Highlights
- Funds from operations for the three months ending June 30, 2008 were
$61.2 million ($0.86 per basic share), an increase of 86% from
Q2 2007;
- Received an average operating netback of $49.08/BOE, an increase of
$28.94/BOE recorded in Q2 2007;
- Earnings for the three months ending June 30, 2008 were $5.7 million
($0.08 per basic share) and $16.1 million for the six months ended
June 30, 2008 ($0.23 per basic share);
- Daily production for the quarter averaged 16,191 BOE, an increase of
21% from Q2 2007;
- Drilled 9 gross wells resulting in 7 (7.0 net) natural gas wells and
2 (2.0 net) light oil wells; a success rate of 100%;
- At June 30, 2008, net debt was $229.3 million with available credit
facilities of $310 million.
Commodity prices combined with year over year production growth lifted
revenues to record levels in the second quarter of 2008. Galleon has generated
funds from operations of $61.2 million in the second quarter of 2008 and
$116.6 million to June 30, 2008. In comparison, funds from operations of
$131.1 million were recorded for the entire year of 2007. The capital program
is expected to be fully funded by funds from operations, another milestone for
Galleon.
Montney update
One of the key achievements in the second quarter of 2008 was the
commencement of production from Galleon's first horizontal well in the East
Montney project located in Dawson, Alberta. In addition, three successful
horizontal wells were drilled in the East Montney project in Q2 2008. The
Montney horizontal drilling program is expected to continue over the next
8-10 years due to Galleon's extensive landholdings in the Peace River Arch
region of Alberta and British Columbia. Today, Galleon has identified 8
Montney resource projects (6 projects in Alberta and 2 in B.C.) spread over a
large land base of approximately 0.5 million gross acres.
The successes of the Montney horizontal drilling program and new
exploration oil and natural gas discoveries have led Galleon to increase the
2008 capital program to approximately $280 million. The 2008 capital program
is expected to be funded by internal cash flow. Approximately 60% of the
capital expenditures in the second half of 2008 will be directed to Montney
resource projects. Galleon expects to employ 7 to 8 rigs to drill between 72
and 80 wells in the second half of 2008.
Included in the expansion of the capital program is the construction of
two natural gas facilities to be located in Dawson and Kakut, Alberta. At
Dawson, a new plant with capacity of 10 Mmcf/d is planned for the southern end
of the Eastern Montney pool. Combined with the existing 30 Mmcf/d natural gas
plant located 20 km to the north, Galleon will have natural gas processing
capacity of approximately 40 Mmcf/d in the area. The new plant is expected to
be on-stream in late Q4 2008 or early Q1 2009. Kakut is located in the Central
Montney region and is expected to be a significant growth area for Galleon. An
owned natural gas plant at Kakut will be expanded from 5 Mmcf/d to 15 Mmcf/d
and is scheduled to be on stream in Q4 2008.
Galleon has access to approximately 1 million gross acres of undeveloped
land, of which 90% is located in the Peace River Arch area of Alberta and
British Columbia. In combination with this large land base, the success of the
drilling program to date, and the drilling opportunities planned during the
second half of 2008, Galleon is positioned for production and reserve growth
in 2008 and 2009.
Management's Discussion and Analysis
This Management's Discussion & Analysis ("MD&A") is intended to assist in
the understanding of the trends and significant changes in the financial
condition and results of operations of Galleon Energy Inc. ("Galleon" or the
"Corporation") for the three and six months ended June 30, 2008 with
comparisons to the three and six months ended June 30, 2007 and as at
December 31, 2007. The MD&A has been prepared by management in accordance with
Canadian generally accepted accounting principles ("GAAP") and should be read
in conjunction with the unaudited interim financial statements as at and for
the three and six month periods ended June 30, 2007 and 2006 and the audited
financial statements and MD&A for the year ended December 31, 2007.
Petroleum and natural gas reserves and volumes are converted to a common
unit of measure on a basis of six thousand cubic feet (Mcf) of gas to one
barrel (Bbl) of oil. BOEs may be misleading, particularly if used in
isolation. The forgoing conversion ratio is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not
represent a value equivalency at the wellhead.
Amounts are shown in Canadian dollars unless otherwise stated. All
production volumes disclosed herein are sales volumes.
This MD&A is based on information available as of, and is dated,
August 13, 2008.
Non-GAAP Measurements
The MD&A contains terms commonly used in the oil and gas industry, such
as funds from operations, funds from operations per share, and operating
netback. These terms are not defined by GAAP and should not be considered an
alternative to, or more meaningful than, cash provided by operating activities
or net earnings as determined in accordance with Canadian GAAP as an indicator
of Galleon's performance. Management believes that in addition to net
earnings, funds from operations is a useful financial measurement which
assists in demonstrating the Corporation's ability to fund capital
expenditures necessary for future growth or to repay debt. Galleon's
determination of funds from operations may not be comparable to that reported
by other companies. All references to funds from operations throughout this
report are based on cash flow from operating activities before changes in
non-cash working capital and abandonment expenditures. The Corporation
calculates funds from operations per share by dividing funds from operations
by the weighted average number of Class A shares outstanding.
Galleon uses the term net debt in the MD&A and presents a table showing
how it has been determined. This measure does not have any standardized
meaning prescribed by Canadian GAAP and therefore may not be comparable to
similar measures presented by other companies.
Forward-Looking Statements
Statements that are not historical facts may be considered forward
looking statements including management's assessment of future plans and
operations, growth expectations within the Corporation, expected production
and production increases, length of drilling program in Montney, expected
general and administration and operating expenses in 2008, expectation that
the Corporation will not be taxable in 2008, drilling plans and the timing
thereof, facilities to be constructed or expanded and the timing thereof,
capital expenditures, the timing thereof and the method of funding thereof.
These forward-looking statements sometimes include words to the effect that
management believes or expects a stated condition or result. All estimates and
statements that describe the Corporation's objectives, goals or future plans
are forward-looking statements. Since forward-looking statements address
future events and conditions, by their very nature they involve inherent risks
and uncertainties including, without limitation, risks associated with oil and
gas exploration, development, exploitation, production, marketing and
transportation, loss of markets, volatility of commodity prices, currency
fluctuations, imprecision of reserve estimates, environmental risks,
competition from other producers, inability to retain drilling rigs and other
services, incorrect assessment of the value of acquisitions, failure to
realize the anticipated benefits of acquisitions, delays resulting from or
inability to obtain required regulatory approvals and ability to access
sufficient capital from internal and external sources. As a consequence,
Galleon's actual results may differ materially from those expressed in, or
implied by, the forward-looking statements. Forward-looking statements or
information are based on a number of factors and assumptions which have been
used to develop such statements and information but which may prove to be
incorrect. Although the Corporation believes that the expectations reflected
in such forward-looking statements or information are reasonable, undue
reliance should not be placed on forward-looking statements because the
Corporation can give no assurance that such expectations will prove to be
correct. In addition to other factors and assumptions which may be identified
in this document, assumptions have been made regarding, among other things:
the impact of increasing competition; the general stability of the economic
and political environment in which the Corporation operates; the timely
receipt of any required regulatory approvals; the ability of the Corporation
to obtain qualified staff, equipment and services in a timely and cost
efficient manner; drilling results; the ability of the operator of the
projects which the Corporation has an interest in to operate the field in a
safe, efficient and effective manor; the ability of the Corporation to obtain
financing on acceptable terms; field production rates and decline rates; the
ability to replace and expand oil and natural gas reserves through
acquisition, development of exploration; the timing and costs of pipeline,
storage and facility construction and expansion and the ability of the
Corporation to secure adequate product transportation; future oil and natural
gas prices; currency, exchange and interest rates; the regulatory framework
regarding royalties, taxes and environmental matters in the jurisdictions in
which the Corporation operates; and the ability of the Corporation to
successfully market its oil and natural gas products.
Readers are cautioned that the foregoing list of all factors and
assumptions is not exhaustive. Additional information on these and other
factors that could affect Galleon's operations and financial results are
included elsewhere herein and in reports on file with Canadian securities
regulatory authorities and may be accessed through the SEDAR website
(www.sedar.com), or at Galleon's website (www.galleonenergy.com). Furthermore,
the forward-looking statements contained herein are made as at the date hereof
and Galleon does not undertake any obligation to update publicly or to revise
any of the included forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required by
applicable securities laws.
Results of Operations
Comparative financial results for the quarter are as follows:
Three months ended June 30 2008 2007
-------------------------------------------------------------------------
1,473,414 BOE 1,216,855 BOE
($000s) $/BOE $/BOE
-------------------------------------------------------------------------
Revenues 120,602 81.85 60,735 49.91
Other income 105 0.07 - -
Royalties (27,155) (18.43) (13,609) (11.18)
GCA(1) 6,097 4.14 2,603 2.14
Transportation costs (2,416) (1.64) (1,408) (1.16)
Operating costs (18,726) (12.71) (10,507) (8.63)
-------------------------------------------------------------------------
Net 78,507 53.28 37,814 31.08
G&A (3,698) (2.51) (1,797) (1.48)
Interest costs (2,977) (2.02) (2,682) (2.20)
Capital and other taxes (358) (0.24) (502) (0.41)
Realized gain (loss)
on financial derivative (10,317) (7.00) - -
-------------------------------------------------------------------------
Funds from operations(2) 61,157 41.51 32,833 26.99
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six months ended June 30 2008 2007
-------------------------------------------------------------------------
3,020,890 BOE 2,286,770 BOE
($000s) $/BOE $/BOE
-------------------------------------------------------------------------
Revenues 222,118 73.53 113,709 49.72
Other income 228 0.08 - -
Royalties (47,823) (15.83) (24,625) (10.77)
GCA(1) 8,520 2.82 5,237 2.29
Transportation costs (4,031) (1.33) (2,995) (1.31)
Operating costs (36,186) (11.98) (19,985) (8.74)
-------------------------------------------------------------------------
Net 142,826 47.29 71,341 31.19
G&A (6,069) (2.01) (3,061) (1.34)
Interest costs (5,780) (1.91) (4,928) (2.15)
Capital and other taxes (697) (0.23) (722) (0.32)
Realized gain (loss)
on financial derivative (13,678) (4.53) 373 0.16
-------------------------------------------------------------------------
Funds from operations(2) 116,602 38.61 63,003 27.54
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) GCA means Gas Cost Allowance
(2) See "Non-GAAP Measurements"
Petroleum and Natural Gas Revenues
Three months ended June 30 2008 2007
-------------------------------------------------------------------------
($000s) % %
Light oil 51,789 43 21,397 36
Heavy oil 16,830 14 7,491 12
NGLs 3,244 3 1,390 2
Natural gas 48,537 40 30,275 50
Royalty income 202 0 182 -
-------------------------------------------------------------------------
Total 120,602 100 60,735 100
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six months ended June 30 2008 2007
-------------------------------------------------------------------------
($000s) % %
Light oil 98,648 44 39,706 35
Heavy oil 30,717 14 14,411 13
NGLs 5,696 3 2,441 2
Natural gas 86,718 39 56,790 50
Royalty income 339 0 361 -
-------------------------------------------------------------------------
Total 222,118 100 113,709 100
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenues for the three months ended June 30, 2008 increased by 99% to
$120.6 million from $60.7 million for the same period of the prior year due to
a 21% increase in average production volumes, a 148% increase in heavy oil
prices, a 72% increase in light oil prices and a 35% increase in gas prices.
In the second quarter of 2008, on a revenue basis, oil and liquids
generated 60% of revenues compared to 50% in the same period of the prior
year.
Production
Three months ended June 30 Six months ended June 30
2008 2007 2008 2007
-------------------------------------------------------------------------
% % % %
Light oil (Bbls/d) 4,629 29 3,317 25 5,015 30 3,223 26
Heavy oil (Bbls/d) 2,066 13 2,247 17 2,228 13 2,164 17
NGLs (Bbls/d) 501 3 256 2 471 3 231 1
Natural gas (Mcf/d) 53,971 55 45,314 56 53,307 54 42,097 56
-------------------------------------------------------------------------
BOE/d (6:1) 16,191 100 13,372 100 16,599 100 12,634 100
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average production volumes of 16,191 BOE/d for the second quarter 2008
were 21% greater than the average of 13,372 BOE/d in second quarter 2007. By
product, production volumes increased as follows: light oil volumes by 40%,
natural gas volumes by 19% and natural gas liquids volumes by 96%. Heavy oil
volumes decreased by 8%.
Commodity Pricing and Marketing
Petroleum products are sold to major Canadian marketers at spot reference
prices based on US WTI for crude oil and AECO for natural gas. As a means of
managing the risk of commodity price volatility, Galleon entered into one term
natural gas contract and three crude oil financial contracts. The natural gas
contract for 10,000 GJ/day was put in place on January 8, 2008 and has a term
from February 1 to December 31, 2008 with pricing subject to a costless collar
of $6.00/GJ and $8.00/GJ Canadian. An additional natural gas contract was
acquired with Adamant. This second contract is for 8,500 GJ/day and was put in
place from January 1, 2008 through December 31, 2008 with pricing subject to a
costless collar of $6.00/GJ to $8.00/GJ Canadian. At the date of acquisition,
this contract represented a $5.3 million liability which will be amortized
into income over the remaining life of the contract. At June 30, 2008, the
balance of this liability was $4.6 million. For the three and six months ended
June 30, 2008, the natural gas contracts had realized losses of $2,456,118 and
$2,869,920 respectively.
For crude oil, Galleon entered into one costless collar contract for
2,000 Bbl/day, fixing a floor price of WTI CDN $70.00/Bbl and a ceiling of WTI
CDN $80.75/Bbl for the period January 1, 2008 to December 31, 2008. A second
crude oil costless collar contract was entered into for 1,000 Bbl/day, fixing
a floor price of $75.00 WTI USD and a ceiling price of $100.00 WTI USD for the
period January 1, 2008 to December 31, 2008. A third crude oil costless collar
contract was entered into for 1,000 Bbl/day, fixing a floor price of $110.00
WTI CDN and a ceiling price of $177.30 WTI CDN for the period July 1, 2008 to
December 31, 2008. For the three and six months ended June 30, 2008, the three
crude oil contracts resulted in realized losses of $10.3 million and
$3.4 million, respectively. Unrealized losses of $32.2 million were recorded
as a liability based on the mark to market value at June 30, 2008 of these
financial contracts. The contracts will protect base line revenues if the WTI
crude oil benchmark falls below floor price. The contracts will be settled
monthly based on the average USD and CDN WTI benchmark price. Galleon will
receive payments on the contracts if the benchmark USD and CDN WTI price falls
below the set floor price and will be required to make payments if the price
rises above the set ceiling price. Galleon has recognized this financial
instrument on its balance sheet at fair value, and is accounting for the
instrument using mark to market accounting.
Prices (net of transportation)
Three months Six months
ended June 30 ended June 30
2008 2007 2008 2007
-------------------------------------------------------------------------
Light oil ($/Bbl) 120.68 70.12 106.77 66.91
Heavy oil ($/Bbl) 88.93 35.89 75.30 36.21
Total oil including
financial derivative
contract ($/Bbl) 93.95 56.42 86.72 54.96
Total oil without
financial derivative
contract ($/Bbl) 110.88 56.42 97.09 54.57
NGLs ($/Bbl) 71.19 59.67 66.42 58.33
Natural gas ($/Mcf) 9.65 7.14 8.70 7.23
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Light oil prices increased by 72% to $120.68/Bbl, excluding the loss
incurred from the crude oil costless collars. Average heavy oil prices of
$88.93/Bbl increased by 148% from the same period of the prior year due to an
increase in demand at refineries which resulted in an improvement in heavy oil
differentials. Average natural gas prices of $9.65/Mcf increased by 35% from
the second quarter of 2007. The average gas price calculated includes the
impact of the two natural gas contracts.
Performance by Property
Three months ended June 30
2008 2007
----------------------------------------- ---------------------- 2008
Oper- Oper- Funds
ating ating from
net- net- oper-
backs/ backs/ ations
Production BOE(1) Production BOE(1) (2)
-------------------------------------------------------------------------
BOE/d % $ BOE/d % $ %
Puskwa 2,391 15 65.48 2,128 16 49.78 20
Eastern Montney
gas 3,172 20 42.07 3,826 29 32.74 17
Eaglesham 2,804 17 58.24 1,713 13 29.83 21
Dawson
conventional 1,824 11 48.44 2,675 20 25.58 11
Edam and other
heavy oil 1,459 9 34.62 2,247 17 10.26 6
Calais 648 4 44.75 374 3 32.74 4
McLean Creek 566 3 99.62 - - - 7
Alexis 1,078 7 45.08 - - - 6
Whitelaw 494 3 22.82 - - - 1
Dixonville 346 2 19.43 - - - 1
St. Anne 286 2 37.75 - - - 1
Jack/Pica 88 1 19.02 - - - -
-------------------------------------------------------------------------
Other 1,035 6 36.73 409 2 15.65 5
-------------------------------------------------------------------------
16,191 100 49.08 13,372 100 28.94 100
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six months ended June 30
2008 2007
----------------------------------------- ---------------------- 2008
Oper- Oper- Funds
ating ating from
net- net- oper-
backs/ backs/ ations
Production BOE(1) Production BOE(1) (2)
-------------------------------------------------------------------------
BOE/d % $ BOE/d % $ %
Puskwa 2,546 15 60.91 1,828 15 49.83 21
Eastern Montney
gas 3,482 21 38.31 3,328 26 31.52 18
Eaglesham 2,950 18 51.34 1,634 13 31.12 21
Dawson
conventional 1,963 12 39.63 2,855 23 27.11 11
Edam and other
heavy oil 1,700 10 28.36 2,165 17 10.25 7
Calais 778 5 36.22 425 3 26.08 4
McLean Creek 608 4 93.05 - - - 8
Alexis 1,028 6 39.04 - - - 5
Whitelaw 247 1 22.82 - - - 1
Dixonville 173 1 19.43 - - - -
St. Anne 143 1 37.75 - - - 1
Jack/Pica 44 0 19.02 - - - -
-------------------------------------------------------------------------
Other 937 6 32.84 399 3 19.22 3
-------------------------------------------------------------------------
16,599 100 44.39 12,634 100 28.91 100
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Operating netbacks/BOE exclude GCA and are calculated by subtracting
royalties and operating costs from revenues and dividing the result
by average production for the period.
(2) See "Non-GAAP Measurements".
Volume growth in Q2 2008 compared to Q2 2007 was led by light oil
production and by the acquisitions of ExAlta in January 2008 and Adamant in
May 2008. Within the last year, Galleon's drilling program has been focused on
light oil projects due to rising oil prices and soft natural gas prices. At
Puskwa, Eaglesham and Mclean Creek, Alberta, light oil volumes were 50% higher
in Q2 2008 than in Q2 2007.
During second quarter 2008, Galleon experienced operational challenges
due to extremely wet conditions caused by a prolonged spring break up period.
Drilling operations commenced in June 2008 resulting in the drilling of 9
successful wells for a success rate of 100%. In addition, several service rigs
and pipeline crews were mobilized in June 2008. The effects of this activity
will be seen in future periods.
At Puskwa, production increased by 12% during second quarter 2008
compared to the same period in 2007. The operating netback was $65.48/BOE, an
improvement of 32% from second quarter 2007. These strong operating netbacks
were driven by average light oil prices (net of transportation) in the period
of $125.12/Bbl. During Q2 2008, Puskwa contributed 20% of funds from
operations from 15% of the production volumes. Average production volumes at
Puskwa during second quarter 2008 were comprised of 83% oil and 17% associated
gas.
The Puskwa project has moved into the development stage with the
implementation of two enhanced recovery schemes. Currently, wells drilled to
date have confirmed that the Beaverhill lake fairway extends over nine miles
in length. Down spacing applications to allow up to 16 wells per section are
planned within the next year. Galleon plans to drill additional wells for oil
targets as well as for injection purposes.
Production averaged 3,172 BOE/d (89% natural gas and 11% oil and liquids)
in the Eastern Montney gas project during second quarter 2008 compared to
3,826 BOE/d in second quarter 2007. This decrease is a result of reduced
activity on this project in the form of fewer vertical Montney gas wells being
drilled in the second half of 2007 and in Q1 2008. Capital was allocated
towards light oil projects given the relative strength of oil prices to gas
prices. In addition, Galleon began to consider the benefits of developing this
project with horizontal wells rather than vertical wells. Galleon's first
horizontal well was drilled in Q1 2008 and commenced production in the latter
part of June 2008. Second quarter 2008 production volumes were affected by
power plant outages at Galleon's natural gas plant. The operating netback of
$42.07/BOE has improved by 28% from second quarter 2007 as a result of recent
strong natural gas prices. The Eastern Montney project contributed 17% to
total funds from operating activities based on 20% of production volumes.
Average production at Eaglesham in the second quarter of 2008 averaged
2,804 BOE/day comprised of 66% natural gas and 34% oil and liquids. Average
production was 1,713 BOE/d at Eaglesham during second quarter 2007. Eaglesham
contributed 21% of the second quarter 2008 funds from operations from 17% of
production volumes.
During Q2 2008, production declines in the Dawson conventional area
resulted in a decrease of 32% in volumes compared to the prior year.
