Mr. John Wright reports
PETROBANK REPORTS Q3 2010 FUNDS FLOW FROM OPERATIONS OF $273 MILLION AND
PROVIDES UPDATE FOR HEAVY OIL BUSINESS UNIT
Petrobank Energy & Resources Ltd. has provided its third quarter 2010 financial and operating results, highlighted by a 91-per-cent increase in funds flow from operations to $273-million ($2.56 per diluted share), and net income of $28-million (25 cents per diluted share).
Petrobank's results include the financial and operating results of PetroBakken Energy Ltd., 59 per cent owned by Petrobank and Petrominerales Ltd., 65 per cent owned by Petrobank. PetroBakken announced second quarter financial and operating results on Nov. 8, 2010. Petrominerales announced second quarter financial and operating results on Nov. 2, 2010.
All references to dollars are Canadian dollars unless otherwise noted.
Third quarter 2010 highlights and significant transactions (comparisons are third quarter of 2010 compared with the third quarter of 2009):
- Increased production by 85 per cent to 72,762 barrels of oil equivalent per day in the third quarter of 2010;
- Increased funds flow from operations by 91 per cent to $273-million ($2.56 per diluted share);
- Achieved net income of $28-million (25 cents per diluted share) in the third quarter compared with net income of $55-million (56 cents per diluted share) in the same 2009 period;
- Announced the distribution of the company's share ownership in Petrominerales to Petrobank shareholders, continuing its long-held corporate goal of enhancing shareholder value by creating strong, independent companies.
Petrobank's heavy oil business unit (HBU):
- Completed the strategic acquisitions of the remaining 50-per-cent working interests in the Kerrobert phase 1 and Dawson projects for a net cash cost of approximately $15-million to increase its domestic resource portfolio to 81 million barrels of conventional heavy exploitable oil in place (EOIP) (1), adding to its Conklin/May River 1.8 billion barrels of best estimate THAI exploitable bitumen in place (2);
- While the company's phase 1 Kerrobert wells averaged only 78 bopd in the third quarter of 2010 due to low on stream times caused by pump interventions, production in the month of November has increased as the company achieved improved on stream times and has recently averaged 280 bopd ranging up to 380 bopd in the last week;
- Phase 1 Kerrobert wells have now demonstrated economic production rates and the company continues to work with McDaniel & Associates Ltd. to recognize THAI reserves for year-end 2010;
- Initiated development of its Kerrobert phase 1 expansion, incorporating 10 new well pairs, with initial air injection targeted for end of first quarter 2011;
- Received final Alberta Energy Resources Conservation Board (ERCB) approval of the company's Dawson project in October, 2010, and it anticipates the finalized Alberta Environment (AENV) approval by the end of November;
- Incurred $23-million of capital expenditures in the third quarter related to its Kerrobert heavy oil project and the Conklin/May River oil sands projects.
PetroBakken:
- Increased production by 124 per cent to 40,095 boepd in the third quarter of 2010, primarily driven by the acquisition of TriStar on Oct. 1, 2009 (as reported in Stockwatch on Oct. 2, 2009), and drilling activities in the Bakken;
- Generated operating netback (excluding hedging gains) of $43.61/boe;
- Invested in capital expenditures of $241-million in the third quarter, of which $55.5-million related to asset and land acquisitions;
- Drilled 115 (75 net) wells with a 99-per-cent success rate in the third quarter including 54 (42.9 net) in the Bakken, 33 (12.5 net) in conventional plays in southeast Saskatchewan and 28 (19.6 net) in the Cardium. At the end of the quarter, 22.8 net wells were waiting to be completed and/or placed on production, the majority of which were associated with the company's Cardium play.
Petrominerales:
- Increased crude oil production by 52 per cent to 32,667 bopd;
- Generated operating netback of $49.74 (Canadian) per barrel in the quarter, a 6-per-cent increase;
- Brought Candelilla-4 well on production from the Guadalupe formation at over 3,000 bopd;
- Commenced drilling the Boa-2 development well on the Corcel block and completed drilling and logging of Arion-1;
- Raised $550-million (U.S.) through a convertible bond issuance in August. The bonds are convertible into common shares of Petrominerales at a conversion price of $34.746 (U.S.) and have an annual coupon rate of 2.625 per cent.
Petrobank's liquidity and capital resources
Each of Petrobank, PetroBakken and Petrominerales manage its capital structure independently; they generate their own cash flows and have the ability to finance their operations through the issuance of secured and unsecured debt as well as equity financing. Petrobank's capital resources are focused on financing corporate activities and the company's HBU expenditures. At Sept. 30, 2010, independent of PetroBakken and Petrominerales, Petrobank on a stand-alone basis had no bank debt outstanding and positive working capital of $6.2-million. A $30-million credit facility remains undrawn.
Based on Petrobank's current ownership in PetroBakken, Petrobank expects to receive $105-million of dividends annually paid monthly. Petrobank received $8-million from Petrominerales' third quarter dividend in October and expects to receive the fourth quarter 2010 dividend in January, 2011. Petrobank also has the option of raising funds by issuing equity, selling a portion of its ownership in PetroBakken or by issuing additional debt secured by the interest in PetroBakken. The company is in discussions with its lead bank and other financial institutions to increase its existing credit facility and extend it to a three-year term.
The company's current intention is to finance its HBU capital expenditure program with cash on hand, available credit, cash from operations and dividends received from PetroBakken.
SUMMARY OF FINANCIAL AND OPERATING HIGHLIGHTS
Three months ended Sept. 30,
2010 2009
Financial ($000s, except where noted)
Oil and natural gas revenue $469,158 $232,471
Funds flow from operations (1) 272,787 142,927
Per share -- basic ($) 2.57 1.55
-- diluted ($) 2.56 1.42
Net income 27,848 54,846
Per share -- basic ($) 0.26 0.59
-- diluted ($) 0.25 0.56
Capital expenditures
PetroBakken 241,309 107,820
Petrominerales 123,858 59,486
Heavy oil business unit (HBU) 49,385 26,737
--------- ---------
Operations
PetroBakken operating netback ($/boe except
where noted) (1)(3)
Oil and NGL revenue ($/bbl) (4) 68.43 67.65
Natural gas revenue ($/Mcf) (4) 3.82 3.55
Oil and natural gas revenue (4) 60.63 60.66
Royalties 8.64 9.62
Production expenses 8.38 6.83
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Operating netback (5) 43.61 44.21
Petrominerales operating netback ($/bbl) (1)
Oil revenue (4) 67.08 61.96
Royalties 9.44 6.06
Production expenses 7.90 8.81
--------- ---------
Operating netback 49.74 47.09
Average daily production
PetroBakken -- oil and NGL (bbl) 33,230 15,185
PetroBakken -- natural gas (Mcf) 41,193 16,177
--------- ---------
Total PetroBakken (boe) (3) 40,095 17,881
Petrominerales -- oil (bbl) (6) 32,667 21,546
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Total company conventional (boe) (7) 72,762 39,427
--------- ---------
Nine months ended Sept. 30,
2010 2009
Financial ($000s, except where noted)
Oil and natural gas revenue $1,575,331 $647,653
Funds flow from operations (1) 941,333 418,433
Per share -- basic ($) 9.07 4.82
-- diluted ($) 8.84 4.44
Net income 151,397 87,971
Per share -- basic ($) 1.46 1.01
-- diluted ($) 1.36 0.96
Capital expenditures
PetroBakken 549,113 216,745
Petrominerales 355,123 234,249
Heavy oil business unit (HBU) 83,971 60,465
--------- ---------
Operations
PetroBakken operating netback ($/boe except
where noted) (1)(3)
Oil and NGL revenue ($/bbl) (4) 71.97 58.67
Natural gas revenue ($/Mcf) (4) 4.31 4.21
Oil and natural gas revenue (4) 64.71 54.25
Royalties 9.17 7.31
Production expenses 7.92 6.72
--------- ---------
Operating netback (5) 47.62 40.22
Petrominerales operating netback ($/bbl) (1)
Oil revenue (4) 66.23 53.35
Royalties 7.72 5.23
Production expenses 6.27 8.03
--------- ---------
Operating netback 52.24 40.09
Average daily production
PetroBakken -- oil and NGL (bbl) 35,229 17,206
PetroBakken -- natural gas (Mcf) 39,473 15,761
--------- ---------
Total PetroBakken (boe) (3) 41,808 19,833
Petrominerales -- oil (bbl) (6) 38,298 21,621
--------- ---------
Total company conventional (boe) (7) 80,106 41,454
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(1) Non-GAAP (generally accepted accounting principles) measure.
(2) Consists of common shares, stock options, deferred common shares,
incentive shares and convertible debentures as at the period end date.
(3) Six million cubic feet of natural gas is equivalent to one barrel
of oil equivalent (boe).
(4) Net of transportation expenses and excludes revenue from purchased oil.
(5) Excludes hedging activities.
(6) Actual production sold for the three and nine months ended Sept. 30,
2010, was 34,830 barrels of oil per day (bopd) and 40,906 bopd, respectively
(2009 -- 21,239 bopd and 21,345 bopd). After adjusting for third party purchased
oil and marketed on its behalf, Petrominerales' actual production sold and used
in per barrel calculations was 32,696 bopd and 38,121 bopd, respectively.
(7) HBU bitumen volumes are excluded from average daily production as
Conklin and Kerrobert operations are considered to be in the preoperating stage
and accordingly are capitalized.Heavy oil business unit operational update
Conklin project
As the company previously disclosed, the P1B and P2B production wells have taken longer than anticipated to establish full communication with the combustion zone. This is primarily due to operational constraints placed on the redrill of these wells, which resulted in the toe of the new wells being placed short of the existing combustion zone. During the third quarter, the company continued to cycle the wells between steam injection and production, which has progressed communication. P3B has been off-line since Aug. 25 to repair a casing vent leak, which affected operations on P1B and P2B due to intermittent plant availability.
Produced oil quality has varied from heavy oil, consistent with the production wells being at the edge of the combustion zone, to upgraded THAI oil. Production rates averaged 101 bopd with peak rates of 495 bopd during the third quarter. The company intends to use the Conklin pilot as a platform to test new technologies such as enriched oxygen injection, direct oxidation of H2S into sulphur and other enhancements to the THAI technology.
Kerrobert project
Since the second quarter, the company has been optimizing the performance of the progressive cavity pumps (PCP) to manage changes in the produced oil characteristics. PCP performance is affected by several factors including: changing API gravity and viscosity as oil quality improves due to THAI oil volumes increasing, higher temperatures at the pump inlet and higher volumes of produced gas with carbon dioxide. These conditions evolve from start-up through to steady state production when the THAI process has become fully developed, requiring a matching of PCP configuration to production conditions. The company has now established a pumping protocol to correspond to these evolving conditions and it is operating in a near-steady state environment with improving well on stream time.
As it moves from the third quarter into the fourth quarter, production has materially increased. The third quarter daily average production was 78 bopd. In October, based on field estimates, average daily production improved to approximately 150 bopd, and the production day average was 225 bopd. In October, the number of on stream days improved to 74 per cent and oil cuts averaged 70 per cent with several days exceeding 90 per cent. Peak production rates of 460 bopd at KP2 and 235 bopd at KP1 were achieved in the last two months. During October, the company experienced a two-week period where the KP2 well averaged 195 bopd and the facility averaged 290 bopd. At these rates, the company has achieved its economic production threshold and it continues to progress toward its 600-bopd-per-well target. In situ oil upgrading has exceeded expectations with average produced oil quality of approximately 18 degrees API compared with the native reservoir quality of 10.3 degrees API. With this level of upgrading, the company is close to achieving the Lloyd Blend Kerrobert pipeline specification of 20.5 degrees API.
As previously reported, the company acquired a 100-per-cent working interest of the phase 1 project lands by purchasing Baytex Energy Ltd.'s 50-per-cent interest effective Sept. 30, 2010. With this acquisition, the company now owns 39 million barrels of conventional heavy EOIP resources at Kerrobert and has initiated the planned 10 well-pair expansion. Environmental and enhanced oil recovery approvals from the Saskatchewan Ministry of Energy and Resources were received on Aug. 6, 2010. Construction of pipeline infrastructure began early in the fourth quarter and drilling operations are currently under way. Installation of surface equipment and other infrastructure is scheduled for later in the fourth quarter. Start-up operations for the preignition heating cycle (PIHC) on the injector wells are planned for early January, 2011, and initial air injection and first oil are expected at the end of the first quarter 2011.
May River project
The May River project is currently in the final detailed engineering phase, and orders have been placed for some long lead time equipment, including power generation and air compression. Upgrades to the existing roads are currently being completed, along with other infrastructure work that can be accomplished prior to receiving final regulatory approval. Draft approval from AENV, which is conditional on receiving ERCB approval, was received on April 12, 2010; however, ERCB project approval remains in process and is expected to be granted upon resolution of two statements of concern filed by local community groups. If regulatory approval is received in 2010, first oil could occur by late 2012.
The company intends to drill 17 oil sands stratigraphic wells this winter to further delineate the broader reservoir, optimize well placements for the 18 well pairs planned for the 10,000 bopd phase 1 development and further delineates the resource for future expansion phases of the May River project.
The company's May River design is CO2 capture ready, incorporates power generation using low energy produced gas, sulphur recovery, and will be a net water producer rather than a net user, making this project a leading-edge design for oil sands and conventional heavy oil development. The project uses a modular approach that is designed to be readily installed and operated on heavy oil projects worldwide. This design is the foundation of the company's planned expansion phases at May River and the template for other projects in other reservoirs due to its simple and modular engineering design.
Dawson project
On Oct. 28, 2010, the company received final ERCB approval for its two-well initial project, and as previously disclosed, it received initial draft approval from AENV on June 26, 2009 (contingent on receiving final ERCB approval). The final AENV approval is expected during the fourth quarter of 2010, completing the regulatory cycle for this phase of the project.
The Dawson property is situated on a large Bluesky heavy oil/oil sands fairway in the Peace River region of northwest Alberta. The upper portions of this formation contain 11-degree API heavy oil, which is comparable with other conventional heavy oil reservoirs throughout Western Canada. Existing conventional cold production typically recovers less than 10 per cent of the original oil in place; with THAI, the company expects to improve the recovery rate to between 70 and 80 per cent. Based on an initial McDaniel evaluation of the resource, the Dawson property was estimated to contain 100 million barrels of conventional heavy total petroleum initially in place (PIIP) (3), with a corresponding EOIP of 44 million barrels, that is highly suited to THAI development. Since the acquisition of 100 per cent of this property, McDaniel has had an opportunity to reassess the resource potential at Dawson. Based on new 3-D seismic data, McDaniel is now assigning 203 million barrels of PIIP. As a result of this acquisition, it now has a 100-per-cent interest in 31.5 sections of land in the Dawson area.
Dawson will initially consist of two THAI well pairs plus associated surface facilities. The company's full-field development plans, based on the initial resource potential, would have supported a 10,000 bopd project. With the increase in the Dawson resource, the company now believes that the resource could ultimately support a 25,000 bopd project. The current surface facilities at Kerrobert will be transferred to Dawson since the company is able to incorporate its first two Kerrobert wells into the new expansion facilities. It anticipates work on the initial two-well project at Dawson to begin during the second quarter of 2011 and PIHC to commence during the third quarter.
THAI reserves
Petrobank continues to work with McDaniel in the evaluation of the THAI resource extraction technology. McDaniel had conducted a comprehensive evaluation of the performance of THAI at Conklin and, from this evaluation, McDaniel concluded that the THAI process is technically proven. McDaniel initially assigned a 17-per-cent greater exploitable resource base at Conklin compared with steam-assisted gravity drainage extraction. The ability to assign exploitable resource is the first step in recognizing THAI reserves. To complete the reserve recognition process, McDaniel indicated that the company would need to achieve sustainable threshold economic production rates over a period of several months.
Now that the company's Kerrobert project has demonstrated sustained production at economic rates, McDaniel is evaluating these results as a basis for assigning THAI reserves. With continued sustained production, the company expects that THAI reserves may be assigned by year-end 2010. Kerrobert can then be used as the "analogue" for assigning reserves for current and future THAI projects.
Archon Technologies
In the third quarter, Archon filed the company's eighth THAI-related patent. This patent improves early THAI oil production rates and further increases the level of in situ oil upgrading. Archon's single-well modified THAI patent was issued in another six countries during the same period. This is the sixth THAI related patent issued to Archon and it has the potential to eliminate the need for a separate air injection well, thus reducing drilling and completion requirements to a single horizontal well and also dramatically reducing the surface footprint.
Archon is pursuing two additional enhancements to the overall THAI process: oxygen-enriched air injection and direct oxidation of H2S. The direct oxidation of H2S will be beneficial on a stand-alone basis for small-scale projects and in conjunction with the company's CrystaSulf process for large-scale projects. The company has matured these technologies and will be testing them at a field-scale level at its Conklin pilot facility in 2011.
While the process to license its technology to major international third parties has been protracted, the company has made progress during the third quarter and, over all, there continues to be considerable interest in THAI and related technologies. Third party international licensing has progressed to the point where the company has two final agreements that may be executed prior to year-end.
Spinout of Petrominerales holdings to Petrobank shareholders
As reported in Stockwatch on Nov. 2, 2010, Petrobank and Petrominerales announced a corporate reorganization that will see Petrobank shareholders receive Petrobank's proportionate interest in Petrominerales (the reorganization). Pursuant to the reorganization, a new Alberta corporation will be formed (New Petrominerales) which will, through a series of transactions under the reorganization, directly or indirectly acquire all of the outstanding shares of Petrominerales. The board of directors of each company, after having received a recommendation from an independent committee of its directors, has unanimously recommended that its shareholders approved the reorganization.
Petrobank shareholders will receive approximately 0.62 of a share of New Petrominerales and one replacement common share of Petrobank for each Petrobank common share held. Following the reorganization, Petrobank will continue to own all existing assets, other than Petrominerales, including the heavy oil and bitumen assets, Archon Technologies Ltd. including the THAI and other related technologies, and ownership of 109.8 million shares of PetroBakken.
This transaction is designed to enhance long-term value for Petrobank and Petrominerales shareholders. The reorganization is consistent with the company's long-held corporate goal of enhancing shareholder value by creating strong, independent companies. Benefits of the reorganization include:
- Petrobank shareholders will receive direct ownership in the shares of New Petrominerales.
- All new and existing Petrominerales shareholders will directly receive future dividends from New Petrominerales.
- Canadian individual shareholders of New Petrominerales will receive dividends eligible for the Canadian dividend tax credit.
- New Petrominerales' public float will increase, providing additional liquidity to shareholders.
- New Petrominerales is expected to qualify for inclusion in the S&P/TSX Composite Index following the reorganization.
- Increased valuation for Petrobank and New Petrominerales may result from the reduction or elimination of any holding company and parent company share price trading discounts.
- The expected date of the reorganization of Dec. 31, 2010, may allow U.S. Petrobank shareholders to benefit from a lower tax rate on the transaction as the receipt of the New Petrominerales shares is expected to be treated as a "qualified dividend," eligible for lower tax rates in 2010 compared with the ordinary income tax rates that are expected in 2011.
The reorganization is subject to the approval of the shareholders of each of Petrobank and Petrominerales. It is anticipated that a joint management information circular containing additional information with respect to the reorganization will be mailed to each Petrobank and Petrominerales shareholder this week, and meetings of the shareholders of each of Petrobank and Petrominerales will be held in mid-December, 2010. The directors of each company, upon considering the recommendations of their respective independent committee, have unanimously recommended that their shareholders approve the reorganization. Pending approvals from the shareholders of each company, approval of applicable courts, receipt of appropriate regulatory approvals and satisfaction of other customary closing conditions, including the receipt of relevant tax rulings, the transaction is scheduled to become effective on Dec. 31, 2010.
The reorganization is expected to be non-taxable to Petrobank and Petrominerales as well as Canadian resident shareholders of both companies. For U.S. shareholders of Petrobank, this transaction will be treated as a taxable dividend according to U.S. tax laws. It is expected that the dividend will be considered a qualified dividend for U.S. tax purposes, subject to the reduced tax rates applicable to long-term capital gains for individuals, provided shareholders meet the holding period requirements. For U.S. shareholders of Petrominerales, this transaction is expected to be non-taxable. Tax information will be published on the websites of both Petrobank and Petrominerales in the near future; however, shareholders are encouraged to seek the advice of their own tax professionals.
(1) Exploitable oil in place is the estimated volume of oil, before any production has been removed, which is contained in a subsurface stratigraphic interval that meets or exceeds certain reservoir characteristics considered necessary for the application of known recovery technologies. Examples of such reservoir characteristics include continuous net pay, porosity and mass bitumen content.
(2) Best estimate THAI exploitable bitumen in place is defined by McDaniel as the best estimate (P50) of a potentially THAI-exploitable interval as containing a minimum thickness of 10 metres of substantially clean, continuous, predominantly bitumen-saturated sand, net of non-reservoir, with log porosity and mass bitumen content (ratio of bitumen to water and mineral matter) meeting a minimum of 27 and 8 per cent, respectively, and with both competent top and lateral reservoir containment. The THAI exploitable interval includes a greater portion of the reservoir than the SAGD exploitable interval due to the assumption that the THAI process will access reservoir that would not be accessible in a conventional SAGD process.
(3) Total petroleum initially in place (PIIP) is that quantity of petroleum that is estimated to exist originally in naturally occurring accumulations. It includes that quantity of petroleum that is estimated, as of a given date, to be contained in known accumulations, prior to production, plus those estimated quantities in accumulations yet to be discovered.
Investor conference call
Management of Petrobank will be holding a conference call for investors, financial analysts, media and any interested persons on Tuesday, Nov. 16, 2010, at 9 a.m. (Mountain Time) (11 a.m. Eastern Time) to discuss Petrobank's third quarter financial and operating results. The investor conference call details are as follows:
Live call dial-in numbers: 416-340-8527/877-240-9772
Replay dial-in numbers: 416-695-5800/800-408-3053
Replay passcode: 7266801
The live audio webcast link is available on the company website.
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