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Galleon Energy Inc
Symbol GO
Shares Issued 83,980,083
Close 2011-01-18 C$ 4.10
Market Cap C$ 344,318,340
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Galleon Energy drills 14 wells in Q4 2010

2011-01-19 19:31 ET - News Release

Mr. Glenn Carley reports

GALLEON ENERGY INC. REPORTS FOURTH QUARTER 2010 OPERATIONS RESULTS AND FIRST QUARTER 2011 UPDATE

Galleon Energy Inc. has released its fourth quarter 2010 drilling and operations results, and has provided an update on first quarter 2011 activities.

Fourth quarter 2010 operations

During fourth quarter 2010, 14 (12.75 net) wells were drilled and cased for production, resulting in five (five net) natural gas and nine (7.75 net) oil wells, for a success rate of 100 per cent.

In the fourth quarter of 2010, the corporation was focused on directing capital resources toward developing lands to which proven and probable undeveloped reserves have been assigned and converting those reserves into production and cash flow.

In accordance with the corporation's continuing goal of value generation through strategically farming out lands from its extensive land base and prospect inventory, the corporation entered into five farm-out deals during the second half of 2010. Three wells have been drilled and five re-entry wells have been completed.

In the fourth quarter of 2010, Galleon experienced delays in obtaining fracture crews and equipment. This resulted in certain newly drilled wells being completed and brought on stream up to three to four weeks later than initially forecast. In January, 2011, Galleon has entered into a strategic agreement to contract equipment and crews for the majority of its currently planned completion activities through to the end of third quarter 2011.

Based on field estimates, production averaged 13,525 barrels of oil equivalent (boe) per day in the fourth quarter of 2010. Galleon expects second half 2010 production to average approximately 13,675 boe per day (70 per cent natural gas and 30 per cent oil and liquids).

During the fourth quarter of 2010, production was impacted by unanticipated events, including delays in fracture operations, the northern Kakut Montney gas pool transitioning to an oil pool, which results in increased future cash flow, a significant oil well transitioning from flowing to pumping and pipeline apportionments.

Eastern Montney business unit

Production is approximately 5,300 boe per day and the program continues to deliver consistent, predictable and economic results. In the fourth quarter of 2010 there were four horizontal Montney wells drilled and placed on production.

Recent drilling in the second half of 2010 has identified an oil-prone Montney fairway that will be further developed in 2011. Although it is still early in the development of this oil fairway, the potential of this oil play has been defined as significant. Four horizontal wells (96-per-cent interest) have been drilled to date, having initial one-month production averaging 107 boe per day (76 per cent oil). The average cost to drill, complete and tie in each well is approximately $1.3-million. An additional three horizontal wells are planned to be drilled in the first quarter of 2011 to further prove up productivity from this new Montney oil fairway.

NPRA business unit

Production is approximately 4,000 boe per day. During the fourth quarter of 2010, Galleon successfully drilled one vertical Montney natural gas well. In addition, two new Triassic oil projects were identified.

One vertical well in the first Triassic oil project was recompleted in the fourth quarter of 2010 with encouraging results. This recompletion, along with vertical well control and seismic, provides support for an emerging Triassic oil play. This play has considerable aerial extent and thick hydrocarbon charge. Galleon plans to follow-up with two horizontal wells in the first quarter of 2011.

In the second Triassic oil project, after comprehensive geological and geophysical analysis, one vertical well test is planned in the first quarter of 2011.

Kakut business unit

Production is approximately 4,200 boe per day.

Kakut, Alberta Montney project

New production and pressure information have confirmed the existence of two separate Montney pools. The southern pool is primarily natural gas, whereas the northern pool has an oil leg. Recent production from the northern pool has seen a transition toward oil. Galleon has a plan to develop this oil resource during 2011. One well is currently on stream and three other standing wells are scheduled to be tied in and brought on stream late in the first quarter of 2011. Galleon plans to further maximize oil production in 2011 by drilling at least one Montney horizontal well in the oil portion of the pool. Producing predominantly oil from this pool will result in increased cash flow due to high crude oil prices.

Kakut, Alberta Doig project

This gassy light oil project continues to deliver economic wells. This Doig reservoir is defined by a large number of vertical control points. Galleon continues to accumulate data and history within this project and, as such, Galleon continues to increase its understanding of the reservoir. In addition, work is continuing to determine the appropriate completion and drilling methods with the goal of optimizing well productivity and cost-efficiency. Galleon plans to complete a Kakut Doig horizontal well in the first quarter of 2011 with a cemented liner system using a higher fracture density than previously deployed.

Effective Jan. 1, 2011, Galleon has received interim ERCB approval of its application for GOR penalty relief for the Kakut Doig B pool. This relates to, as previously disclosed, production curtailment of two Kakut Doig wells (100-per-cent interest) located at 04-28-074-03W6 and 16-06-075-03W6. The two wells are currently on stream.

First quarter 2011 operations

The focus of the first quarter 2011 capital program will be on the continued development of the light oil and natural gas projects in the Kakut, Eastern Montney and North Peace River business units.

Currently, Galleon has three drilling rigs working and plans to drill up to 19 wells in the first quarter of 2011. Estimated capital expenditures of approximately $33-million have been allocated to the drilling program in first quarter 2011. These expenditures are expected to be financed by working capital and cash flow.

2011 guidance

The 2011 capital expenditure budget of up to $131-million is expected to be allocated 80 per cent toward low-risk development locations in the Montney, Doig and North Peace River producing areas. Approximately 70 per cent of the capital program is directed toward oil projects. Financing of the 2011 capital program is expected to be largely from internal cash flow and working capital.

In 2011, the corporation will continue to farm out lands, some of which are prospective for emerging resource plays, including those in Nordegg, Duvernay and Slave Point. The goal will be to have third parties finance and prove up the potential of the lands while retaining a significant portion of the net resource. A number of opportunities have been identified on Galleon's land base of approximately 779,000 net acres.

Projected 2011 cash flows are approximately 20 per cent to 25 per cent higher than 2010 cash flows. 2011 cash flow per basic share is estimated to be approximately $1.50. At Dec. 31, 2011, the corporation estimates a net-debt-to-cash-flow ratio of approximately 1.2 to 1.3.

For 2011, the corporation has commodity hedge contracts in place for 33.3 million cubic feet per day of natural gas with an average fixed price of $5.71 per thousand cubic feet and 2,500 barrels per day of crude oil with an average price of $88 per barrel WTI.

Production in 2011 is expected to average 14,500 boe per day (31 per cent oil, 3 per cent liquids and 66 per cent natural gas). Galleon has used average commodity price assumptions of $85 (U.S.) per barrel WTI for oil and $3.70 per gigajoule for natural gas in the 2011 corporate budget. A foreign exchange rate of 97 cents has been used.

2010 year-end financial and reserves information

Galleon is scheduled to announce 2010 financial and reserves information on March 10, 2011, after close of market.

We seek Safe Harbor.

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