Mr. Michael Kobler reports
UNDERGROUND ENERGY CORPORATION ANNOUNCES Q1 2012 FINANCIAL RESULTS
Underground Energy Corp. has released its financial results for the quarter ended March 31, 2012.
All amounts are in United States dollars unless otherwise noted and these results
have been prepared in accordance with international financial reporting
standards (IFRS).
Recent highlights
Highlights for the quarter ended March 31, 2012, include:
- Renewing permits for two drill pads and six well locations at the Zaca
field extension project;
- Entry into an agreement with Key Energy Services to secure a drilling
rig for the initial portion of the company's 2012 drilling program
comprising a minimum of five wells with an option for an additional
five wells;
- Spudding and drilling the Chamberlin 4-2 well, the initial well drilled
by the company at its recently acquired 6,200-net-acre Chamberlin lease
in the Zaca field extension project in Santa Barbara county,
California, to a total depth of 6,679 feet.
Highlights subsequent to quarter-end include:
- Encouraging initial results from the Chamberlin 4-2 well which
encountered oil shows in a number of sections and, in particular,
penetrated more than 900 feet of continuous, strong oil shows in a
section of the Monterey shale consistent with the most productive
sections at the existing Zaca oil field and elsewhere in the Santa
Maria basin;
- Receipt of the year-end reserve evaluation conducted by GLJ Petroleum
Consultants Ltd. of Calgary, the company's independent reserve
engineers, dated April 12, 2012, and evaluating the company's proved,
probable and possible reserves as at Dec. 31, 2011, in accordance
with the Canadian standards and requirements of National Instrument
51-101 -- standards of disclosure for oil and gas activities -- as detailed
in the company's press release dated April 10, 2012;
- Spudding and drilling of the Chamberlin 3-2 well, a twin well
offsetting the Chamberlin 4-2 well by 300 feet, directly targeting the
newly discovered Chamberlin East fault block, to a total depth of 7,685
feet with similar results to the Chamberlin 4-2 well with more than
1,200 feet of oil-saturated Monterey shale formation as outlined in the
company's press release dated May 23, 2012.
"In the first quarter of 2011, we initiated a multiwell drilling
program at the recently acquired Zaca field extension project," said
Michael Kobler, president and chief executive officer of Underground. "Subsequent to
quarter-end, we saw positive indications from our first well, the
Chamberlin 4-2, which pointed to the discovery of the Chamberlin East
fault block. We moved rapidly to drill a second well that specifically
targeted this block and saw similar results including strong,
continuous oil shows, leading us to initiate production testing on the
Chamberlin 3-2 well. We continue to believe the Zaca field extension
project holds significant potential to drive a near-term increase in
production and we remain focused on assessing its broader potential."
Adoption of shareholder rights plan
Underground today also announced that its board of directors has
approved the adoption by the company of a shareholder rights plan. The rights plan has been adopted by the company to
ensure the fair treatment of shareholders in connection with any
takeover bid, and to provide the board of directors and shareholders
additional time to fully consider any unsolicited takeover bid. The
rights plan will also provide the board of directors more time to
pursue, if appropriate, other alternatives to maximize shareholder
value. A copy of the rights plan is available under the company's
SEDAR profile.
The rights plan, which is effective as of May 23, 2012, has
conditionally been approved by the TSX Venture Exchange and must be
approved by shareholders at the annual and special general meeting of
the shareholders of the company currently scheduled for June 26, 2012.
Under the rights plan, rights have been issued and attached to all
shares of the company issued and outstanding as of the close of
business on May 23, 2012. Additional rights will be issued upon any
future issuance of any shares of the company that occur prior to the
separation time (as defined in the rights plan). If approved by
shareholders, the rights plan will have an initial term of three years.
If not approved, the rights will be redeemed in accordance with the
terms of the rights plan.
The company is not adopting the rights plan in response to any specific
takeover bid or other proposal. Additionally, the rights plan is not
intended to prevent takeover bids, and under the rights plan those
bids that meet certain requirements intended to protect the interests
of all shareholders are deemed to be permitted bids. Permitted bids
must be made by way of a takeover bid circular prepared in compliance
with applicable securities laws and remain open for 60 days. In the
event a takeover bid does not meet the permitted bid requirements of
the rights plan, the rights will entitle shareholders, other than any
shareholder or shareholders making the takeover bid, to purchase
additional shares in the company at a substantial discount to the
market value of the shares at the time.
Adoption of code of conduct
Effective May 23, 2012, Underground has adopted a code of business
conduct and ethics for its directors, officers and
employees which includes policies concerning ethical conduct, conflicts
of interest, the keeping of financial records and procedures in
relation to the foregoing. A copy of the code is available under the
company's SEDAR profile.
FINANCIAL REVIEW
Three months ended Three months ended
March 31, 2012 March 31, 2011
Net loss $2,550,702 $714,250
Net (loss) per share -- basic and diluted (0.01) (0.01)
Cash and cash equivalents
As a development-stage company, Underground constantly consumes cash for
its operating activities and for its investing activities. During the
first quarter, shareholders provided financial support by exercising
warrants to acquire additional common stock. Proceeds to the company
were $438,750.
Property plant and equipment
Property plant and equipment (PP&E) assets increased by approximately
$2,483,000 during the quarter. The net increase in PP&E assets was due
primarily to drilling and geological and geophysical development at Zaca.
Exploration and evaluation assets
Exploration and evaluation (E&E) assets increased by approximately
$640,000 during the quarter. The $1,025,000 of additions to E&E assets
during the quarter were due primarily to geological, geophysical
investigations and seismic surveys at Devil's Den of $610,000 and
$255,000 at other projects; lease acquisitions at AMI 1 of $90,000; and
annual lease payments on various projects totalling $70,000. The
additions were offset by $385,000 of impairments recorded on leases the
company does not intend to renew.
NET LOSS
Three months
ended March 31,
2012 2011
Oil and natural gas revenue $163,538 -
Other income - 47,925
163,538 47,925
Production and operating expense 411,593 -
Exploration and evaluation expense 570,099 279,904
Administrative expense 1,723,183 470,949
Operating loss 2,541,337 702,928
Net finance expense (income) 748 11,322
Loss before loss of equity-accounted investments 2,542,085 714,250
Loss of equity-accounted investments 8,617 -
Loss and comprehensive loss for the year 2,550,702 714,250
Net loss increased by $1,836,500 compared with last year due to the
build-out of the company as it developed its oil and gas prospects and
increased its land acquisition activities, including:
- Oil and natural gas revenue and production and operating expense
increased by $163,538 and $411,593, respectively, due to the
acquisition of three producing wells that were included in the oil and
gas lease acquisition that closed during the fourth quarter of 2011.
During the quarter, a recompletion on the single gas well was
unsuccessful and was shut in. Work was conducted on each of the two
oil wells to maintain production.
-
Exploration and evaluation expense increased by $290,000 compared with
last year primarily due to $385,000 in impairments recorded on leases
acquired in the package in the fourth quarter of 2011 that the company
does not intend to renew. This increase was offset by decreases in
exploration-related expenditures as the company's focus shifted from
investigating new acquisitions to developing the properties under
lease.
-
Administrative expense increased by $1,252,000 compared with last year
primarily due to a $600,000 increase in personnel cost of which
approximately 50 per cent was attributable to share-based compensation expense;
$228,000 increase in legal, audit and other professional fees; $256,000
warrant liability mark-to-market adjustment; $80,000 in investor
relations expenses; and the balance of the increase, $88,000, due to the
higher level of activity in 2012, compared with 2011.
Outlook
The company is focused on the drilling program currently under way at its
Zaca field extension project, where its initial well (Chamberlin 4-2)
encountered 900 feet of continuous strong oil shows in a new fault
block. The company's second well
(Chamberlin 3-2) directly targeted the newly discovered Chamberlin East
block and encountered more than 1,200 feet of continuous strong oil
shows. Underground is currently preparing to production test the
Chamberlin 3-2 well. The company intends to move the drilling rig to a
second adjacent pad and drill the Chamberlin 2-2, a first well from
this pad, and will look to add further production at Zaca as it
continues to implement its 2012 drilling program. Subsequent to
drilling the Chamberlin 2-2, the company will release this rig and
plans to contract with a rig capable of drilling deeper to further
exploit the deep structures identified on seismic. At the same time,
it will continue to process and acquire additional seismic at Zaca and
its other core assets.
To view the company's first quarter 2012 financial statements, related
notes to the financial statements, and management's discussion and
analysis, please see the company's quarterly filings which will be
available on SEDAR.
We seek Safe Harbor.