CALGARY, Nov. 13 /CNW/ - Galleon Energy Inc. ("Galleon") announces
financial and operating results in third quarter 2008.
Highlights:
- Galleon drilled 33 wells and cased 31 wells (29 net) for production;
a success rate of 94%. Eleven wells (9.5 net) were cased for light
oil and 19 wells (18.6 net) were cased for natural gas. One well
(1.0 net) was cased as a water injector;
- Daily production during third quarter 2008 averaged 17,200 BOE, an
increase of 6% from Q2 2008 and an increase of 25% from Q3 2007;
- Funds from operations for the three months ending September 30, 2008
were $58.3 million ($0.80 per basic share), an increase of 79% from
Q3 2007;
- Earnings for the three months ending September 30, 2008 were
$38.1 million ($0.52 per basic share) compared to $1.6 million
($0.03 per basic share) in Q3 2007;
- An average operating netback of $44.42/BOE was recorded in Q3 2008,
an increase of 71% from Q3 2007;
- Operating expenses decreased by $0.76/BOE to $11.95/BOE in Q3 2008
from $12.71/BOE in Q2 2008;
- Invested $88.8 million on exploration and development activities;
- At September 30, 2008, $227.3 million was drawn on available credit
facilities of $310 million. Net debt including capital lease
obligations was $261.0 million; and
- Current production is approximately 18,800 BOE/d based on current
field report estimates. Fourth quarter 2008 average production is
expected to range between 18,800 and 19,600 BOE/d.
2009 budget and financial capacity
The 2009 capital expenditure program has been approved by the Board of
Directors and is expected to be between $170 million and $190 million. The
2009 capital expenditure program will be funded from cash flow. Production is
expected to average 20,400 BOE/d in 2009. Galleon plans to drill up to 43
light oil wells and 55 natural gas wells in 2009.
Should commodity prices continue to weaken further, Galleon is prepared
to cut budgeted capital expenditures to match the reduced funds from
operations resulting from the weaker commodity prices. Galleon has access to
credit facilities of $310 million of which $60 million is estimated to be
unused at December 31, 2008.
2009 catalysts to growth and value - low risk and low costs projects that
are repeatable, predictable and with size:
Eastern Montney resource project
- Large potential resource with a drilling inventory of over 300
horizontal locations
- Low cost production and reserves with strong economics
- Current production of over 4,000 BOE/d net reflects a consistent
drilling success exceeding 90%
Central and Western Montney resource project
- Discovered 3 large resource pools with aggregate current production
of over 5 Mmcf/d net with approximately 6 Mmcf/d net of natural gas
and 200 Bbl/d net of liquids behind pipe waiting on facility
completion (on stream in late Q4 2008/early Q1 2009)
Light oil projects
- Discovered one light oil resource pool
- Consistent drilling success in our projects at Eaglesham, Puskwa,
McLeans Creek and Kimiwan/Culp have delivered production growth which
will generate substantial cash flow for reinvestment in the resource
projects
- Current inventory of over 200 locations
Eastern Montney Project Update
To date in 2008, 22 horizontal wells have been drilled of which 18 have
been completed in the Eastern Montney resource project. Up to three more
horizontal wells are planned before the end of 2008. All horizontal wells have
been completed with multi staged fractures.
The horizontal drilling results to date have been very positive. Fourteen
wells are currently producing an aggregate of approximately 15.0 Mmcf/d net
and 250 BOE/d net of liquids (2,750 BOE/d net). Two wells are waiting on
equipping and four wells are waiting on completion. Two wells are waiting to
be recompleted. On wells drilled to date, a success rate exceeding 90% using
the horizontal multi staged fractures has been demonstrated.
The economics of the Eastern Montney resource project are robust. The
average cost to drill, complete and tie-in each horizontal well is
approximately $1.3 million. On average, pay out of the capital costs of each
horizontal well is under one year based on current market commodity prices,
royalty rates and operating costs.
The Eastern Montney resource pool has been delineated during the last
three years through vertical well control over an extensive area of 35 miles
by 12 miles. A drilling inventory in excess of 300 horizontal locations has
been identified. The current aggregate production has reached over 4,000 BOE/d
net (22 Mmcf/d of natural gas and 350 Bbl/d). Current natural gas plant
capacity is 33 Mmcf/d with a new 10 Mmcf/d gas plant scheduled to be on stream
in Q2 2009.
Central Montney Project Update
The Central Montney area has delivered strong production growth and is
expected to result in considerable reserve volume being added in 2008. A
number of large pools have been identified based on 3D seismic and well
control.
Production from one of these pools, delineated through wells drilled in
early Q3 2008, is currently 4 Mmcf/d net from one horizontal well and two
vertical wells. This pool is planned to be developed with a combination of
vertical and horizontal wells.
A second pool has been recently confirmed through successful drilling
results and is estimated to be 10 sections in size. Current production from
the second pool is approximately 1 Mmcf/d net.
In addition, tested production of approximately 5 Mmcf/d net of natural
gas is behind pipe awaiting completion of Galleon's natural gas plant
expansion. This gas plant expansion to 15 Mmcf/d is expected to be on stream
in late Q4 2008/early Q1 2009.
In total, 5 new central Montney resource plays have been identified which
are expected to deliver important production and reserves growth to Galleon
over the next 3 years.
Western Montney Project Update
In Q3 2008, Galleon drilled its first Montney horizontal with multi
staged fractures in BC. The well (77% interest) tested at 370 BOE/d (200 Bbl/d
and 1 Mmcf/d of natural gas) over a three day period and confirmed the
economic viability of a significant new Mid Montney turbidite trend. The trend
is definable on 3D seismic and is over 6 miles in length and approximately 1
mile wide. The well is currently being tied in to a Galleon owned facility in
order to conserve the gas and is expected to be on stream during Q1 2009. A
second horizontal well was drilled into the fairway and is currently being
evaluated. In Q2 2009, Galleon plans to drill up to 2 horizontal wells on this
trend. A vertical well to test an upper Montney play at Two Rivers is also
planned.
Light Oil Project Update
The light oil projects continue to contribute steady cash flow to
Galleon. Recent drilling has focused on the Culp/Kimiwan and McLeans Creek
areas in Alberta. These areas have delivered an average 80% drilling success
rate in part due to the extensive 3D seismic data base owned by Galleon.
Production from Culp/Kimiwan and McLeans Creek has grown to approximately
1,500 BOE/d net in Q3 2008, a 65% increase over Q3 2007.
Over 140 locations have been identified on the existing 3D seismic in the
light oil project areas. Additional locations are expected to be added to the
inventory upon completion of a new 275 square km 3D seismic program which is
currently being shot. The drilling locations in these areas target single well
pools. These pools are eligible for a $1 million royalty holiday under the new
Alberta royalty framework. Up to 4 light oil targets are planned to be drilled
at Eaglesham during Q4 2008.
Puskwa continues to be a strong producer with average production of 2,390
BOE/d net in Q3 2008. Applications for an expansion of the water flood program
and down spacing have been submitted for regulatory approval. Based on down
spacing, up to 60 additional locations have been identified.
Recently, Galleon has discovered one light oil resource pool and plans to
further delineate the pool over the next 12 months.
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 nine months ended September 30, 2008 with
comparisons to the three and nine months ended September 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 nine month periods ended September 30, 2008 and 2007, 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, November
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, expected general and administrative expenses and
operating expenses in 2008, drilling and completion plans and the timing
thereof, facilities to be constructed or expanded and the timing thereof,
availability under credit facilities, capital expenditures, 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.
Galleon completed the acquisition of Adamant Energy Inc ("Adamant") in Q2
2008, and the acquisition of ExAlta Energy Inc. ("ExAlta") in Q1 2008.
Results of Operations
Comparative financial results for the quarter are as follows:
Three months ended September 30 2008 2007
-------------------------------------------------------------------------
1,582,369 BOE 1,262,772 BOE
($000s) $/BOE $/BOE
-------------------------------------------------------------------------
Revenues 115,835 73.20 60,156 47.64
Other income 105 0.07 - -
Royalties (24,485) (15.48) (12,608) (9.98)
GCA(1) 3,711 2.35 1,988 1.57
Transportation costs (2,140) (1.35) (1,430) (1.13)
Operating costs (18,917) (11.95) (10,547) (8.35)
-------------------------------------------------------------------------
Net 74,109 46.84 37,559 29.75
G&A (3,238) (2.05) (1,507) (1.19)
Interest costs (2,759) (1.74) (2,707) (2.14)
Capital and other taxes (284) (0.18) (229) (0.18)
Realized loss on financial
derivative (9,497) (6.00) (551) (0.44)
-------------------------------------------------------------------------
Funds from operations(2) 58,331 36.87 32,565 25.80
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine months ended September 30 2008 2007
-------------------------------------------------------------------------
4,603,259 BOE 3,549,542 BOE
($000s) $/BOE $/BOE
-------------------------------------------------------------------------
Revenues 337,953 73.42 173,864 48.98
Other income 333 0.07 - -
Royalties (72,308) (15.71) (37,233) (10.49)
GCA(1) 12,231 2.66 7,225 2.04
Transportation costs (6,171) (1.34) (4,424) (1.25)
Operating costs (55,103) (11.97) (30,533) (8.60)
-------------------------------------------------------------------------
Net 216,935 47.13 108,899 30.68
G&A (9,307) (2.02) (4,568) (1.29)
Interest costs (8,539) (1.85) (7,634) (2.15)
Capital and other taxes (981) (0.21) (951) (0.27)
Realized loss on
financial derivative (23,175) (5.03) (178) (0.05)
-------------------------------------------------------------------------
Funds from operations(2) 174,933 38.02 95,568 26.92
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) GCA means Gas Cost Allowance
(2) See "Non-GAAP Measurements"
Petroleum and Natural Gas Revenues
Three months ended September 30 2008 2007
-------------------------------------------------------------------------
($000s) % %
Light oil 55,872 48 24,569 41
Heavy oil 11,417 10 7,315 12
NGLs 3,362 3 1,398 2
Natural gas 44,967 39 26,491 44
Royalty income 217 - 383 1
-------------------------------------------------------------------------
Total 115,835 100 60,156 100
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine months ended September 30 2008 2007
-------------------------------------------------------------------------
($000s) % %
Light oil 154,520 46 64,274 37
Heavy oil 42,134 12 21,726 13
NGLs 9,058 3 3,839 2
Natural gas 131,685 39 83,281 48
Royalty income 556 - 744 -
-------------------------------------------------------------------------
Total 337,953 100 173,864 100
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenues for the three months ended September 30, 2008 increased by 93%
to $115.8 million from $60.2 million for the same period of the prior year due
to much higher commodity prices as well as a 25% increase in daily average
production volumes.
In the third quarter of 2008, on a revenue basis, oil and liquids
generated 61% of revenues from 40% of the volumes sold. This compares to 55%
of revenues from 41% of volumes sold in the same period of the prior year.
Production
Three months ended Nine months ended
September 30 September 30
2008 2007 2008 2007
-------------------------------------------------------------------------
% % % %
Light oil (Bbls/d) 5,222 30 3,375 25 5,084 30 3,273 25
Heavy oil (Bbls/d) 1,257 7 1,949 14 1,902 11 2,092 16
NGLs (Bbls/d) 499 3 237 2 481 3 233 2
Natural gas (Mcf/d) 61,329 60 48,989 59 56,001 56 44,421 57
-------------------------------------------------------------------------
BOE/d (6:1) 17,200 100 13,726 100 16,800 100 13,002 100
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average production volumes of 17,200 BOE/d for the third quarter 2008
were 25% greater than the average of 13,726 BOE/d in third quarter 2007. By
product, production volumes increased from Q3 2007 as follows: light oil
volumes by 55%, natural gas volumes by 25% and natural gas liquids volumes by
111%. Heavy oil volumes decreased by 36%.
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 six 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 $7.00/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 September 30, 2008,
the balance of this liability was $2.3 million. For the three and nine months
ended September 30, 2008, the natural gas contracts had realized gains of
$2,117 and a realized loss of $2,867,802 respectively.
Galleon has six crude oil costless collar contracts:
January 1, 2008 -
December 31, 2008 2,000 Bbl/d WTI CDN $70.00-$80.75/Bbl
January 1, 2008 -
December 31, 2008 1,000 Bbl/d WTI USD $75.00-$100.00/Bbl
July 1, 2008 -
December 31, 2008 1,000 Bbl/d WTI CDN $110.00-$177.30/Bbl
October 1, 2008 -
December 31, 2008 1,000 Bbl/d WTI USD $100.00-$120.00/Bbl
October 1, 2008 -
December 31, 2008 1,000 Bbl/d WTI USD $100.00-$120.00/Bbl
January 1, 2009 -
June 30, 2009 1,000 Bbl/d WTI USD $100.00-$115.00/Bbl
For the three and nine months ended September 30, 2008, the crude oil
contracts resulted in realized losses of $9.5 million and $23.2 million,
respectively. Unrealized losses of $3.3 million were recorded as a liability
based on the mark to market value at September 30, 2008 of these financial
contracts. The contracts will protect base line revenues if the WTI crude oil
benchmark falls below the floor prices. The contracts will be settled monthly
based on the average USD and CDN WTI benchmark prices. Galleon will receive
payments on the contracts if the benchmark USD and CDN WTI prices fall below
the set floor prices and will be required to make payments if the prices rise
above the set ceiling prices. Galleon has recognized these financial
instruments on its balance sheet at fair value, and is accounting for the
instrument using mark to market accounting.
Prices (net of transportation)
Three months ended Nine months ended
September 30 September 30
2008 2007 2008 2007
-------------------------------------------------------------------------
Light oil ($/Bbl) 115.20 78.43 109.68 71.33
Heavy oil ($/Bbl) 98.51 40.04 80.45 37.41
Total oil including financial
derivative contract ($/Bbl) 96.03 63.25 89.61 57.98
Total oil without financial
derivative contract ($/Bbl) 111.96 64.38 101.72 58.10
NGLs ($/Bbl) 73.16 64.05 68.78 60.29
Natural gas ($/Mcf) 7.73 5.73 8.34 6.68
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Light oil prices increased by 47% to $115.20/Bbl, excluding the loss
incurred from the crude oil costless collars. Average heavy oil prices of
$98.51/Bbl increased by 146% from the same period of the prior year. Average
natural gas prices of $7.73/Mcf increased by 35% from the third quarter of
2007. The average gas price calculated includes the impact of the two natural
gas contracts.
Performance by Property
Three months ended September 30
2008 2007
------------------------------------- ---------------------
Operating Operating 2008
Average netbacks/ Average netbacks/ Funds from
Production BOE(1) Production BOE(1) operations(2)
-------------------------------------------------------------------------
BOE/d % $ BOE/d % $ %
East Montney 3,627 21 34.14 3,936 29 19.72 16
Eaglesham 3,118 18 38.77 1,909 14 23.63 16
Puskwa 2,390 14 75.24 2,058 15 55.41 24
North Peace
River Arch 1,891 11 25.69 - - - 6
Alexis/St.
