CALGARY, ALBERTA--(Marketwire - Nov. 13, 2008) - Pearl Exploration and Production Ltd. ("Pearl" or the "Company") (TSX:PXX)(FIRST NORTH:PXXS) is pleased to announce the results for the third quarter ended September 30, 2008.
FINANCIAL AND OPERATING HIGHLIGHTS
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Three months ended Nine months ended
September 30 September 30
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2008 2007 2008 2007
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FINANCIAL ($000's,
except per share data)
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Total revenue 33,638 24,916 123,146 67,859
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Cash flow from
operations before
working capital
changes (2) 21,021 6,268 68,496 11,468
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Per common share
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Basic and diluted ($) 0.11 0.04 0.36 0.08
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Net income (loss) 1,926 (13,683) 4,823 (38,536)
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Per common share
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Basic and diluted ($) 0.01 (0.09) 0.03 (0.28)
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Capital expenditures 39,480 47,446 74,597 140,787
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Total assets 554,956 654,543 554,956 654,543
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Total long-term
financial
liabilities 13,499 14,512 13,499 14,512
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Working capital
(deficiency) 36,147 (87,588) 36,147 (87,588)
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Shareholders' equity 496,400 500,882 496,400 500,882
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OPERATIONAL
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Daily Production
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Oil - net production
(bbls/d) 4,401 6,973 6,578 5,852
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Gas - net production
(mcf/d) 8,156 12,608 9,434 12,758
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Total net production
(boe/d) 5,776 9,093 8,166 7,998
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Product Pricing
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Oil - average selling
price per bbl ($/) 95.85 41.94 77.68 40.26
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Gas - average selling
price per mcf ($) 8.08 5.01 8.54 6.40
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Weighted average sales
price per boe ($) 85.02 39.17 72.78 39.87
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Royalties ($/boe) 22.51 9.43 18.26 8.93
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Operating costs
(including
transportation
expenses) ($/boe) 18.74 15.23 18.99 16.44
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Petroleum and Natural
Gas ("PNG") Netback
(3) ($/boe) 43.77 14.51 35.53 14.50
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Common Share Information
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Weighted average
shares outstanding
(basic) 189,241,716 145,615,529 189,241,716 137,389,099
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Weighted average
shares outstanding
(diluted) 189,241,716 145,880,287 189,242,004 137,741,368
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Shares outstanding
at end of period 189,241,716 147,434,697 189,241,716 147,434,697
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Volume traded during
the quarter 17,442,292 26,011,475 91,897,535 78,023,421
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Share price ($)
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High 2.48 5.30 2.80 5.93
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Low 0.91 3.30 0.91 3.30
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Close (end of period) 1.30 3.94 1.30 3.94
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(1) Barrel of oil equivalent (or "BOE") amounts referenced have been
calculated using a conversion rate of six thousand cubic feet of
natural gas to one barrel of oil. BOEs may be misleading, particularly
if used in isolation. A BOE conversion ratio of 6 mcf:1 bbl is based on
an energy equivalency.
(2) Cash flow from operations before working capital changes and cash flow
per share do not have standardized meanings prescribed by Canadian
Generally Accepted Accounting Principles ("GAAP") and therefore may
not be comparable to similar measures used by other companies. Cash
flow from operations before working capital changes includes all cash
flow from operating activities and is calculated before changes in
non-cash working capital. Cash flow from operations before working
capital changes is reconciled with net loss on the Consolidated
Statement of Cash. Management uses these non-GAAP measurements for its
own performance measures and to provide its shareholders and investors
with a measurement of the Company's efficiency and its ability to fund
a portion of its future growth expenditures.
(3) PNG netback is a non-GAAP measure used by management as a measure of
operating efficiency and profitability and may not be comparable to
similar measures used by other companies. It is calculated by deducting
royalties, operating costs and transportation costs from petroleum and
natural gas revenues.
Letter to Shareholders
The third quarter of 2008 represented a major shift in the market conditions impacting the business model of the Company. July saw the highest wellhead pricing and wellhead netbacks in our history, $94.01 and $53.08 respectively which declined throughout the period to an average of $71.32 and $32.90 in September. These values have continued to decline into the fourth quarter as overall market conditions also continued to deteriorate. This fall was partially offset by a historic weakening of the Canadian dollar which fell from approximately par at the beginning of July to under $0.80 at times during October. As essentially all of our product sales trade in reference to US dollars, a falling Canadian dollar helps mitigate the impact of falling oil and natural gas prices as the majority of our costs are in Canadian dollars. While our long term outlook on commodity prices and in particular heavy oil prices remains highly positive, we have adjusted our budget and financial outlooks to reflect the difficult pricing environment we are currently experiencing.
The Company remains dedicated to our capital budget philosophy, which is to fund capital programs based on available cash flow from operations and proceeds from non-core asset sales. As such, as a result of the dramatic decrease in current commodity prices we have deferred several of the projects in our recently announced budget to result in a firm budget of approximately $110 million for 2008. As a result, some anticipated production increases and pilot advancement activities will be delayed. It is the Company's intention to re-instate these deferred projects when the prices for oil and natural gas return to more normal levels.
On the positive front, the Company has a very strong balance sheet and is well positioned to weather the current financial crisis. Due to the sale of $79 million in non-core producing assets and cash flow from operations of approximately $68.5 million, to the end of Q3, including a strong quarterly cash flow performance of $21 million in the third quarter, we find ourselves in the enviable position of having a $36 million working capital surplus, a $47 million un-drawn credit facility with Alberta Treasury Branch ("ATB") and have no requirements to raise additional financing through either debt or equity, despite an aggressive 2008 capital spending program being undertaken on our four core assets.
We have made good progress on all four core assets with each of them making significant strides down the path to adding value in terms of our core strategy of converting resources first to reserves and then ultimately to production and cash flow. We have production pilots up and running at three of these core assets (Mooney, Onion Lake and San Miguel) and have increased our ownership interests and are working towards pilot implementation on our Blackrod project.
At Mooney, the most significant events were the initiation of the water flood and the commencement of injection of polymer at the pilot project. The water flood includes the drilling of 7 additional wells and will essentially be completed by the end of the year. Implementation of the water flood is critical for maintaining reservoir pressure and should help check the current declines in the field. Polymer injection commenced on October 30th and results are expected to be observed in the next three to six months. Polymer flooding has the potential to significantly increase both production rates and recoveries in the field if successful.
At Onion Lake, the cyclic steam stimulation ("CSS") pilot project continued to produce positive results. The first well (Z1) had sustained flow rates of over 150 barrels of oil per day in the first production cycle, approximately 3 times greater than our modeled expectations. The second well (Z2) encountered some mechanical issues, but still achieved a rate of over 70 barrels of oil per day. Z1 is currently undergoing the second injection cycle with the second production cycle at Z1 expected to commence in mid-November. The Z2 well should begin the second steam injection cycle in the next couple of weeks. Based on the positive results to date, up to 3 additional CSS wells are being planned in order to better quantify the reservoir distribution and performance. It is expected that a decision on whether to go ahead with the first phase of a commercial steam development will be made by mid-year 2009.
At San Miguel, the Chittum Steam Assisted Gravity Drainage ("SAGD") pilot, in the central portion of the field, was put on full SAGD mode in September and we have seen the first production start to ramp-up in the producing well. It will likely take several months for the steam chamber to build to sufficient size to allow the well to achieve full production rates, but initial results are encouraging. The Saner pilot, in the northern portion of the field, utilizes the Fracture Assisted Steam Technology ("FAST") used by Conoco in their original pilot and is currently injecting steam in the pre-heating phase. This pilot will use horizontal wells in a portion of the pilot area, as opposed to all vertical wells used by Conoco. In parallel with these pilots, numerous commercial optimization studies including the fuel source selection for steam generation and the marketing of the very heavy oil in this project are being investigated. It is expected that both the pilot and the commercial study results will be completed by mid-year 2009 and thus a commercial development decision can be made at that time.
At Blackrod, we are awaiting approvals from the Alberta and Canadian Federal regulatory agencies for our SAGD pilot project. The winter season in 2008 / 2009 will be used to gather additional essential information including cores, water source and disposal information and oil viscosity data. We are targeting a startup date for the Blackrod pilot in the first quarter of 2010. As previously announced we acquired an additional 30% working interest in the Blackrod project on August 20, 2008. In addition, in September and early October, we acquired approximately net 36 sections of crown lands in the area and very recently we have entered into an agreement with our remaining partner Serrano Energy Ltd. ("Serrano") to swap our equity interests in Serrano for a 15% increased interest in the Blackrod project and a carried work commitment of $5 million. We expect to close this transaction prior to year end. We have the right and we intend to become operator of the Blackrod project as soon as reasonably practicable.
Our production averaged 5,776 Boed per day during the third quarter down from 8,246 Boed day in the second quarter. The three primary reasons for this drop were the aforementioned sale of non-core producing properties, the forced shut-in of approximately 700 Boed from our Mooney Field due to CO2 content in the gas greater than permitted on the pipeline and natural declines. We have solved the CO2 issues through the installation of an amine plant to remove excess CO2 from our solution gas. Productive capacity is now over 6000 Boed. We expect to exit the year at between 6000 and 7000 Boed. This production is not only vital to our cash flow for development activities but will also be helpful in our resource to reserves strategy.
Despite the current impact of low oil and natural gas prices on our near term cash flow, we remain very encouraged on the value and viability of our large scale heavy oil fields. Our strong balance sheet will allow us to emerge from this crisis in a very favorable position at a time when reserves will hopefully be at a premium as more and more projects are put on hold or delayed. Existing announced refinery upgrade and heavy oil pipeline projects appear to remain on track and will require significant supplies of heavy oil in the future. Our primary goal is to keep our projects moving forward at the best possible speed without exposing the Company to financial leverage or risk until the market recovers.
Keith Hill, President and CEO
PEARL EXPLORATION AND PRODUCTION LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three months ended September 30, 2008 and 2007
Management's discussion and analysis ("MD&A") of Pearl Exploration and Production Ltd.'s (the "Company" or "Pearl") financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements for the three and nine months ended September 30, 2008 and 2007 as contained in this interim report and the MD&A and audited financial statements for the fifteen months ended December 31, 2007 and twelve months ended September 30, 2006 contained in the Company's 2007 Financial Report. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and are presented in Canadian dollars unless otherwise indicated. The effective date of this MD&A is November 13th, 2008.
Additional information relating to the Company is available on SEDAR at www.sedar.com and on the Company's web-site at www.pearleandp.com.
Forward-Looking Statements
Forward-looking statements: This document contains statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, the regulatory process and actions, technical issues, new legislation, competitive and general economic factors and conditions, the uncertainties resulting from potential delays or changes in plans, the occurrence of unexpected events, and the Company's capability to execute and implement its future plans. Actual results may differ materially from those projected by management. Although the Company has attempted to identify important factors that could cause the actual events or results to differ materially from those described in forward-looking statements, readers are cautioned that the foregoing list of risks and factors is not exhaustive and there may be other factors that cause events or results not to be as anticipated, estimated or intended. Forward-looking statements are based on management's estimates, beliefs and opinions on the date the statements are made. Although the Company believes that the expectations represented by such forward-looking statements and the assumptions of the Company upon which they are based are reasonable, there can be no assurance that such expectations will prove to be correct. The Company assumes no obligation except as outlined by regulatory requirements to update forward-looking statements if circumstances of management's estimates, beliefs or opinions should change. Additional information on these and other potential factors that could affect the Company's financial results are detailed in documents filed from time to time with the Alberta, British Columbia and Ontario Securities Commissions. Accordingly, readers should not place undue reliance on forward-looking statements. For such statements, we claim the safe harbour for forward-looking statements within the meaning of the Private Securities Legislation Reform Act of 1995.
All references to BOEs are based on a 6 to 1 conversion ratio. BOEs may be misleading, particularly if used in isolation. A BOE conversion of 6 Mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
OVERVIEW
Pearl is a Canadian-based oil and gas company whose common shares are traded on the TSX Exchange under the symbol "PXX". Pearl's main focus is large, heavy oil projects in Canada and the USA. The Company also holds interests in a number of natural gas properties.
Pearl's core properties include:
- Onion Lake, Saskatchewan - heavy oil;
- Mooney, Alberta - heavy oil;
- Blackrod, Alberta - heavy oil;
- San Miguel, Texas - heavy oil
OPERATIONS UPDATE
Mooney Heavy Oil Project - Alberta
As of the end Q3 2008 Pearl has drilled ten net horizontal wells in our Mooney area thus far in 2008. Four of the eight wells were drilled as part of the polymer pilot which will consist of two polymer injection wells and two producers. Regulatory approval has been obtained for the polymer pilot and polymer injection began in late October of 2008. Preliminary results from the pilot are expected by Q1 2009. Plans for a field wide polymer flood implementation are expected to be finalized by Q2 2009 with the initiation of full field implementation targeted as early as Q4 2009.
In addition we have continued to advance the conversion of the field to a water flood project. During Q3 an additional 1.5 sections were approved for water flood with water injection expected to commence in late Q4 2008 and early Q1 2009. In addition, one additional section is awaiting waterflood approval which is expected to commence water injection in Q1 2009. The water flood will ultimately assist in both maintaining production levels and increasing reserves as recoveries are expected to increase with the demonstration of pressure maintenance, a decreasing gas/oil ratio ("GOR") and sustained production. In the event that the polymer pilot is successful the investment in the infrastructure implemented for the water flood will be used as base infrastructure for the polymer flood. While the Company expects that the implementation of the water flood will result in both sustained production and higher reserve recovery, in the short term as the field is converted there will be intermittent production disruption in Mooney.
The Company was successful at a crown land sale acquiring 6 sections (1536 hectares) of land at 100% working interest in the Mooney core area.
The Mooney field produced approximately 1,650 Boed during Q3. Production from Mooney was curtailed significantly for approximately nine weeks, beginning at the end of June by approximately 700 Boed. This shut-in was a result of our pipeline provider, on short notice, terminating our ability to ship solution gas that contained higher than permitted CO2 on their system. To rectify the situation we procured, installed and commissioned an amine plant in less than 10 weeks. As a result we now have the capability to remove excess CO2 from our gas stream which allows us to ship our gas production to market without interruption to service.
Onion Lake Heavy Oil Project - Saskatchewan
In Onion Lake the Cyclic Steam Stimulation (CSS) thermal pilot continues. The first well ("Z1") has completed the first steam and production cycles, with a peak rate of over 150 Bopd being achieved. The Z1 well began its second injection cycle September 21/08. Steam injection on the second well ("Z2") began on June 20th and the first production cycle commenced on August 11, 2008. Mechanical issues were experienced during the steam cycle on the Z2 well resulting in a small amount of steam entering the reservoir. As a result, the first production cycle of the Z2 well was lower than expected. It is anticipated that the Z2 well will perform similarly to the Z1 well when similar amounts of steam have been injected into the reservoir. We are currently preparing to begin the second steam cycle in the Z2 well.
During Q3 production from Onion Lake average approximately 2,300 Boed; this excludes production from the CSS thermal pilot as net revenue from the pilot is captured as an offset to the net capital costs for that project.
Blackrod Heavy Oil Project - Alberta
At Blackrod, as previously announced the Company closed a transaction on August 20th to acquire an additional 30% working interest in the Blackrod project area. The company paid $4.5 million in cash and, if successful, will be required to make additional payments totaling up to $11 million, based on pre-set criteria of success. In September and early October the Company was also successful at 2 separate crown land sales and acquired an additional 36 sections (9,216 net hectares) of oil sands leases contiguous to our project area. Subsequent to the end of Q3 the Company entered into an agreement with Serrano to increase our working interest in the original project area from 65% to 80% in return for the disposal of our interests in Serrano and a carried work program of net $5 mm over the next twelve months.
Pearl intends to continue its plan to drill 10 to 15 stratigraphic core wells in the 2008/2009 winter to further delineate this deposit and gather additional petrophysical and reservoir fluid characteristic data. The application for the required governmental approvals of the thermal SAGD pilot project was submitted in May of 2008 and is expected to be approved in the next 6 to 12 months.
There is currently no production at Blackrod and we do not anticipate any production coming from Blackrod until our pilot project is operational. We currently anticipate the pilot being operational in 2010.
San Miguel Heavy Oil Project - Maverick Basin, South Texas
At San Miguel, Pearl and its 50% partner TXCO continued steam injection at the Steam Assisted Gravity Drainage ("SAGD") pilot located within the Chittim "B" Lease. Production, temperature, and pressure monitoring of the well pair continue to confirm that the well pair has entered SAGD mode with initial oil flows being observed.
At Saner Ranch, the pilot facility construction is proceeding on schedule with mechanical completion still expected to be completed in early December. The Saner Ranch pilot includes a vertical inverted five spot well pattern and a horizontal three well pattern that both utilize a modified Fracture Assisted Steamflood Technology ("FAST") process. Steam injection into the vertical inverted five spot pattern commenced on August 28 as part of the reservoir warm-up phase with initial indications of connectivity being observed within the inverted 5 spot pattern. The three horizontal wells were completed in September and achieved first steam injection / reservoir warm-up phase as scheduled on October 8, 2008. Preliminary performance results from both patterns are anticipated during the first half of 2009.
By the end of the second quarter of 2009, Pearl expects to be in a position to select which of the three recovery techniques will be used to form the basis of a commercial development project, SAGD or one of the two modified FAST techniques. In addition, work continues on the commercial aspects of a successful project in San Miguel including the method in which the JV will generate energy to produce steam and the markets and value of the production from the project.
The is currently no commercial production in San Miguel and we do not anticipate any commercial production originating from San Miguel until the JV moves into a commercial development of this resource. We have begun to see early production in the Chittum pilot in October.
Other Properties - Alberta, Saskatchewan
In order to enhance the value of certain non-core assets, Pearl initiated a 9 well drilling program at Ear Lake, Salt Lake and Druid in Q3, which is now complete. All of these wells will initiate production in Q4. Overall, the production increase from this program is expected to reach between 400 and 500 bopd by year end.
Production from other non-core Canadian properties averaged 1,800 Boe/d in Q3. It is still the intention to sell these properties once market conditions improve.
Other Properties - U.S.
The Company also holds interests in several other areas in the United States, including Queen City gas fields, the West Rozel and Gunnison Wedge in Utah, Promised Land and Fiddler Creek in Montana and Queen City gas field in Texas. There is limited or no production from these areas and there are only minor evaluation plans contemplated for these lands in 2008. However, the Company believes certain of these lands contain large resource potential and may, based upon further evaluation, be developed in the future.
In September, we agreed to dispose of our land and tangible interests in the Palo Duro basin to Tyner Resources Ltd. ("Tyner") in exchange for an equity interest in Tyner. This transaction is consistent with our strategy to focus on our 4 core areas and is expected to close prior to year-end.
Production
Q3 production averaged 5,776 boed in line with expectations given that volumes were curtailed in Mooney due to the previously discussed CO2 issue. That situation has now been addressed and full production in Mooney has been restored. We maintain our previous guidance of 6,000 to 7,000 boed for the remainder of the year.
RESULTS OF OPERATIONS
Oil and Gas Production, Pricing and Revenue
Three months ended Nine months ended
September 30 September 30
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2008 2007 2008 2007
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Daily production / sales
volumes (1)
Oil (bbl/d) 4,401 6,973 6,578 5,852
Natural gas (mcf/d) 8,156 12,608 9,434 12,758
Combined (1) (boe/d) 5,776 9,093 8,166 7,998
Product pricing ($)
Crude oil - per bbl 95.85 41.94 77.68 40.26
Natural gas - per mcf 8.08 5.01 8.54 6.40
Combined - per boe 85.02 39.17 72.78 39.87
Revenue (000's)
PNG revenue - gross 45,180 32,786 162,849 87,052
Royalties (11,962) (7,889) (40,849) (19,495)
PNG revenue - net 33,218 24,898 122,000 67,557
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- gas production converted at 6:1
(1) Includes small amounts of NGLs not separately identified in the table
For the three months ended September 30, 2008 production has decreased from the prior year three-months ended September 30, 2007 due to the company disposing of non-core properties during the prior quarter representing approximately thirty percent of daily production, natural decline and the unscheduled shut-in of approximately 700 Boed of production in Mooney due to the requirement to install and an amine facility to decrease the CO2 in our associated gas production. In addition during the current quarter, wells were taken offline in order to complete some drilling in Mooney.
The significant increase in revenue for both the three and nine months ended September 30, 2008 is primarily due to the higher market pricing for heavy oil and natural gas in 2008.
Royalties
Three months ended Nine months ended
September 30 September 30
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2008 2007 2008 2007
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Royalties 11,962 7,889 40,849 19,495
as a percentage of PNG revenue 26% 24% 25% 22%
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Royalties represent charges against production or revenue by governments and landowners. Royalties for the three and nine months ended September 30, 2008 increased over the comparable periods of 2007. This increase is consistent with the increase in revenues during the period.
As expected royalties as a percentage of revenue are consistent between 2008 and 2007.
PNG Operating Expenses and Netbacks
Three months ended September 30 Nine months ended September 30
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2008 2007 2008 2007
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Total Per boe Total Per boe Total Per boe Total Per boe
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Average
daily
produc-
tion 5,776 9,093 8,166 7,998
Gross
PNG
revenue 45,180 85.02 32,786 39.17 162,849 72.78 87,052 39.87
Royal-
ties (11,962) (22.51) (7,889) (9.43) (40,849) (18.26) (19,495) (8.93)
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Net PNG
revenue 33,218 62.51 24,897 29.74 122,000 54.52 67,557 30.94
Operating
costs (9,272) (17.45) (12,245) (14.64) (39,609) (17.70) (33,327) (15.26)
Transport-
ation (686) (1.29) (498) (0.59) (2,886) (1.29) (2,571) (1.18)
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PNG
netback 23,260 43.77 12,154 14.51 79,505 35.53 31,659 14.50
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Operating Expenses
Third quarter operating costs on a per boe basis were higher when compared to the same period in 2007, averaging $17.45 for the three months ended September 30, 2008 in comparison to $14.64 per boe in 2007. For the nine months ended September 30, 2008 operating costs were $17.70 per boe as compared to $15.26 for the nine months ended September 30, 2007. The increase in per unit operating costs for the nine month period is principally due to several factors including: (i) high cost of propane incurred in Q1; (ii) timing of focusing resources on developing efficiencies with regards to operating costs; and (iii) $2.2 million or $1.02 per boe of underestimated 3rd party costs that related to prior periods that was recognized in the first quarter.
