Published: August 03, 2011
Fairborne Announces Second Quarter 2011 Results
Fairborne (TSX:FEL) is pleased to provide this summary of its financial and operating results for the second quarter of 2011. A complete copy of the Company's interim consolidated financial statements for the three and six months ended June 30, 2011, along with management's discussion and analysis in respect thereof will be filed on SEDAR and is available on the Company's website at www.fairborne-energy.com.
HIGHLIGHTS
-- Average quarterly production of 13,971 BOE per day exceeded Company
guidance despite the impact of first quarter property dispositions
(1,800 BOE per day) and production interruptions;
-- Production disruptions, which included outages at the Kaybob K3 gas
plant as well as weather delays and other plant turnarounds reduced
average production by approximately 1,500 BOE per day in the second
quarter;
-- Company operated Marlboro gas plant has been operating at, or in excess
of, design capacity (40 MMcf per day) since its start up in mid May
2011;
-- Current production is approximately 15,000 to 15,200 BOE per day, on
trend to meet third quarter guidance of 15,000 to 15,500 BOE per day and
expected exit production of 16,500 to 17,000 BOE per day for 2011;
-- Completed the disposition of a 40% interest in the new Marlboro gas
plant for proceeds of $18 million, while retaining a 42% working
interest as well as priority access to the divested capacity and
operatorship of the facility;
-- Continued strong operating netback of $24.26 per BOE ($26.70 per BOE
excluding annual prior year Crown royalty adjustments) reflecting light
oil and NGL content as well as a competitive cost structure;
-- Operating costs of $8.89 per BOE for the second quarter reflected
initial cost reductions achieved with the start-up of the Marlboro gas
plant and the sale of higher cost properties in the first quarter.
Additional reductions are expected going forward as the Marlboro plant
was only operational for half of the second quarter;
-- Funds generated from operations of $27.2 million ($23.5 million after
deducting interest expense) reflected higher natural gas prices and
lower operating costs offset by a $3.1 million crown royalty adjustment;
-- Exploration and development spending totaled $26.0 million, including
initial construction of the Marlboro gas plant and excluding the partial
divestiture in the plant for proceeds of $18 million;
-- Road bans and spring break-up limited the second quarter drilling
program to three wells (1.5 net) including two (0.8 net) natural gas
wells on the Company's Marlboro property and one (0.7 net) oil well at
Sinclair; and
-- Quarter end net debt was $130.6 million, ($230.6 including convertible
debentures) on an available credit facility of $325 million.
FINANCIAL & OPERATING SUMMARY
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2011 2010 2011 2010
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Financial ($THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Petroleum and natural gas revenue 54,442 59,633 102,973 123,015
Funds generated from operations (1) 27,241 32,261 57,074 75,017
Per share - basic $0.27 $0.31 $0.56 $0.73
Per share - diluted $0.26 $0.31 $0.55 $0.73
Cash flow from operations
(including changes in working
capital) 24,102 26,273 49,198 70,817
Per share - basic $0.24 $0.26 $0.48 $0.69
Per share - diluted $0.23 $0.26 $0.47 $0.69
Profit 652 2,361 33,302 13,446
Per share - basic $0.01 $0.02 $0.33 $0.13
Per share - diluted $0.01 $0.02 $0.32 $0.13
Exploration and development
expenditures 26,039 21,492 97,695 88,708
Proceeds from the sale of petroleum
and natural gas properties (17,920) - (141,380) -
Working capital (surplus) deficit
(excluding convertible debentures) (21,673) 6,487 (21,673) 6,487
Bank indebtedness 152,227 123,081 152,227 123,081
Net debt (excluding convertible
debentures) 130,554 129,568 130,554 129,568
Convertible debentures 98,706 96,508 98,706 96,508
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Operations
Average production
Natural gas (Mcf per day) 65,171 66,812 64,365 63,862
Crude oil (bbls per day) 2,287 3,110 2,497 3,055
Natural gas liquids (bbls per day) 766 1,149 892 919
Sulphur (tonnes per day) (2), (4) 56 92 62 73
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Total (BOE per day) 13,971 15,486 14,179 14,690
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Average sales price (3)
Natural gas ($ per Mcf) 4.45 4.91 4.40 5.31
Crude oil ($ per bbl) 94.13 75.79 87.47 77.48
Natural gas liquids ($ per bbl) 63.75 36.24 58.60 40.87
Sulphur ($ per tonne) (4) 127.96 60.26 111.94 29.64
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Netback per BOE ($ per BOE)
Petroleum and natural gas sales (3) 40.50 39.63 39.82 42.14
Sulphur block revenue - 2.52 - 3.95
Royalties (6.30) (6.16) (4.63) (5.35)
Operating expenses (8.89) (9.22) (9.14) (8.95)
Transportation (1.05) (1.10) (1.05) (1.07)
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Operating netback 24.26 25.67 25.00 30.72
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Wells drilled (gross) 3 1 25 17
Undeveloped land (net acres) 228,272 232,466 228,272 232,466
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(1) The calculation of funds generated from operations and cash flow from
operations for the three months ended June 30, 2011 exclude $3.7 million
(2010 - $3.2 million) of interest expense which is classified as finance
expense under IFRS. Similarly, for the six months ended June 30, 2011,
$7.8 million (2010 - $6.2 million) of interest expense is classified as
finance expense under IFRS.
(2) A BOE conversion ratio has been calculated using a conversion rate of
one tonne of sulphur to one barrel.
(3) Excludes the change in fair value of derivatives.
(4) Excludes the sale of inventory at the West Pembina sulphur block.
PRODUCTION
Fairborne's second quarter average production was above target at 13,971 BOE per day, with new wells largely offsetting 3,300 BOE per day of reductions in the quarter due to the impact of production interruptions (approximately 1,500 BOE per day) and the non-core property disposition completed in the first quarter (approximately 1,800 BOE per day).
Mechanical failure at the Kaybob K3 gas plant continued to negatively impact Fairborne's average daily production into the second quarter of 2011. Volume restrictions associated with third party facilities reduced second quarter average daily production by approximately 1,400 BOE per day. Wet conditions and road bans on the Company's Manitoba and southeast Saskatchewan properties reduced second quarter average production by an additional 100 BOE per day.
The impact of third party restrictions was largely alleviated with the start up of the Company's Marlboro gas plant on May 11, 2011; while operations in Manitoba and Saskatchewan resumed just recently in early July 2011.
Fairborne's current production is approximately 15,000 to 15,200 BOE per day and the Company remains on target to meet its goal for 2011 exit production of 16,500 to 17,000 BOE per day.
FINANCIAL AND OPERATING RESULTS
Second quarter operating netbacks remained strong at $24.26 per BOE despite crown royalty adjustments of $3.1 million ($2.44 per BOE) recorded in the second quarter. Fairborne's light crude oil and liquid rich natural gas production enables the Company to maintain strong netbacks despite low market prices for natural gas. In addition, the higher heat content of Fairborne's natural gas and the Company's active risk management program contributed to a realized natural gas price of $4.45 per Mcf for the second quarter, which remained 15% higher than the AECO daily benchmark.
Second quarter operating costs of $8.89 per BOE reflected operating cost reductions achieved with the start-up of the Marlboro gas plant and the impact of the first quarter non-core asset disposition, which included properties with a combined operating cost exceeding Fairborne's corporate average. The Company expects operating costs to range between $8.00 and $9.00 per BOE for the balance of 2011.
Fairborne's financial flexibility remains solid with bank credit facilities renewed at $325 million and net debt of $230.6 million (including convertible debentures) at the end of the second quarter. Debt levels have consistently decreased in 2011 reflecting the non-core property disposition in the first quarter and the partial divestiture of the Marlboro gas plant which closed in the second quarter.
EXPLORATION AND DEVELOPMENT ACTIVITIES
The Company's Marlboro property continues to deliver successful results and high economic returns. The Marlboro gas plant has been running at, or above, design capacity (40 MMcf per day) since its start-up in mid May 2011. Two (0.8 net) natural gas wells were drilled in Marlboro during the second quarter. The first well (0.5 net) was recently completed and flowed on an inline test rate of 9.0 MMcf per day plus liquids. Completion operations are currently under way on the second well.
Plans for the second half of 2011 include drilling six (4.0 net) Wilrich horizontal wells and two (1.3 net) horizontal Bluesky locations offsetting successful industry activity that has significant natural gas liquids yields of 40 to 50 bbls per MMcf of gas.
Fairborne currently has 14 (10.2 net) Wilrich horizontal wells on production. Total production from the area, net to Fairborne, is approximately 6,000 BOE per day. Based on planned operations, Fairborne will utilize one drilling rig from mid-June 2011 until spring of 2012 to consecutively drill 10 (6.5 net) Wilrich wells. Fairborne's current inventory of Wilrich locations at Marlboro has grown to 70 (46.2 net) wells.
Improved weather conditions in Manitoba have enabled the Company to finally resume operations and drilling activities in its core area of Sinclair. Three (2.7 net) wells which were drilled prior to break-up but were unable to be completed due to weather conditions have recently been completed and are currently being evaluated. Based on preliminary evaluations, all three wells are expected to meet or exceed the Company's new type curve initial production rate of 80 bbls per day. The first well in the second half drilling program was spud in July 2011 and the Company remains optimistic that it will be able to execute the majority of its planned 18 (14.5 net) well drilling program prior to year end.
Other projects in the second half drilling program are also proceeding including the Cadomin test well at Voyager/Brown Creek which was delayed slightly due to wet field conditions. The 02/16-36 well spud in late July 2011 and has a planned TD of 3,950 meters. In addition, the Company continues to build the surface location for the first Cardium horizontal well in the Harlech area which follows up on the successful vertical recompletion program. This well is expected to spud in early September 2011.
OUTLOOK
Fairborne's capital program for the remainder of 2011 is focused in three core areas on high rate of return light oil and liquids rich natural gas projects. Total expenditures for the last six months are budgeted at approximately $78 million with 37 (26.0 net) wells largely concentrated on the following projects:
-- Marlboro/Pine Creek - $36 million including six (4.0 net) horizontal
Wilrich wells and two (1.3 net) horizontal Bluesky locations;
-- Sinclair, MB - $21 million including 18 (14.5 net) wells targeting light
crude oil; and
-- Greater Harlech Area - $10 million including one (1.0 net) Cadomin test
well at Voyager/Brown Creek and two (1.5 net) Cardium horizontal wells.
Fairborne's corporate objectives for 2011 remain the same:
-- Third quarter average production of 15,000 to 15,500 BOE per day;
-- Fourth quarter average production of 16,000 to 16,500 BOE per day;
-- Exit production of 16,500 to 17,000 BOE per day;
-- Capital expenditures of approximately $155 million;
-- Drilling and completion of 64 wells, of which 41 are horizontal
multistage fractured wells; and
-- Net debt of approximately $240 to $245 million at year end (assuming
bank debt is utilized to pay convertible debentures in December 2011).
Fairborne is a crude oil and natural gas exploration, development and production company headquartered in Calgary, Alberta, Canada. Fairborne's shares trade on the Toronto Stock Exchange under the symbol "FEL".
Forward-Looking Statements
Certain information set forth in this press release, contain forward-looking statements including management's assessment of future plans and operations, drilling plans, expected activity levels, expected production levels, expected reduction in operating costs and expected operating costs for the balance of 2011, expected well results at Sinclair, expected year end net debt, the capital expenditure budget, timing of expenditures, nature of expenditures and impact of capital expenditures for the balance of 2011. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond Fairborne's control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, loss of markets, delays resulting from or the inability to obtain required regulatory approvals, inability to retain and delays in retaining drilling rigs and other services, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the lack of availability of qualified personnel or management, stock market volatility, incorrect assessment of the value of acquisitions, failure to realize the anticipated benefits of acquisitions and ability to access sufficient capital from internal and external sources. The foregoing list is not exhaustive. Additional information on these and other risks that could affect Fairborne's operations and financial results are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com), or at Fairborne's website (www.fairborne-energy.com). Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. The actual results, performance or achievement of Fairborne could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits that Fairborne will derive therefrom. Fairborne disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities laws.
Barrels of Oil Equivalency
Barrel of oil equivalent ("BOE") amounts may be misleading, particularly if used in isolation. A BOE conversion ratio has been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel and one tonne of sulphur to one barrel. This conversion ratio of six thousand cubic feet of natural gas to one barrel is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
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