Emerge Oil & Gas Inc.
TSX : EME

March 24, 2010 18:35 ET

Emerge Announces 2009 Financial and Operating Results and Provides Operational Update

CALGARY, ALBERTA--(Marketwire - March 24, 2010) - Emerge Oil & Gas Inc. ("Emerge" or the "Company") (TSX:EME) is pleased to announce its financial and operating results for the year ended December 31, 2009. The Company has filed its annual audited financial statements and related management's discussion and analysis ("MD&A") for the year ended December 31, 2009 on SEDAR at www.sedar.com and on the Company's website at www.emergeoilandgas.com.

Certain operational and financial highlights for the fourth quarter and year ended December 31, 2009 with 2008 comparatives are outlined below and should be read in conjunction with Emerge's audited financial statements and related MD&A.

2009 Highlights:

  • Reported funds flow per share of $0.11 per share compared to $0.00 per share in 2008;
  • Increased average production 1,108% to 1,244 boe/d from 103 boe/d in 2008;
  • Achieved record average production in the fourth quarter of 2009 of 2,440 boe/d, from 105 boe/d in the fourth quarter of 2008;
  • Improved operating netback to $16.93/boe from $2.58/boe in 2008;
  • Completed the acquisition by Plan of Arrangement with Ivory Energy Inc. on March 26, 2009 for a total cost of $21.6 million representing cash consideration paid and assumption of debt; assets included 950 boe/d of production, 2.2 million boe of proved plus probable reserves and drilling and optimization upside;
  • Performed 85 well reactivations on Ivory properties, adding approximately 1,500 boe/d of initial production at a capital cost of less than $5,000/boe;
  • Closed equity financing with a syndicate of underwriters on November 19, 2009 of 32.775 million subscription receipts at $2.00 per subscription receipt for gross proceeds of $65.55 million;
  • Completed the acquisition of producing properties in the Lloydminster and Battlebend areas on November 30, 2009 for a total cost of $85.8 million paid by $68.8 million in cash and $17.0 million in common shares of Emerge (8.5 million shares valued at $2.00 per share); assets included 2,200 boe/d of production, 4.6 million boe of proved plus probable reserves and drilling and optimization upside;
  • Established new credit facilities with a Canadian chartered bank totalling $37.5 million ($30 million operating line and $7.5 million acquisition/development line);
  • Drilled 18 (18 net) heavy oil wells at a 100% success rate;
  • Shot 70 kilometers of new 2D seismic data, supplementing the extensive 2D and 3D data to further delineate our oil pools and adding to our drilling inventory;
  • Divested of minority interests in non-core natural gas property in December 2009 for net proceeds of $6.6 million;
  • Despite high levels of capital activity, maintained a net debt to trailing quarterly cash flow ratio of less than 2:1 at December 31, 2009;
  • Maintained a clean balance sheet exiting 2009, with a net debt and working capital deficiency of $15.7 million compared to credit facilities totalling $37.5 million;
  • Developed a drilling inventory of over 200 locations at December 31, 2009, representing 3+ years of drilling on current Company lands;
  • Identified over 200 reactivation opportunities at December 31, 2009 on properties acquired during 2009;
  • Assembled undeveloped lands of approximately 19,000 net acres, plus downspacing opportunities on developed lands;
  • Recorded $140 million of capital expenditures, allocated approximately 75% toward the two significant acquisitions in the year;
  • Based on proved plus probable reserve additions and excluding changes in future development capital, reported finding and development costs of $10.75/boe ($26.81/boe including changes in future development capital) and finding, development and acquisition costs of $13.79/boe ($18.12/boe including changes in future development capital);
  • Increased year-end proved plus probable reserves 2,198% to 9.0 million boe at December 31, 2009 from 0.4 million boe at December 31, 2008; and
  • Exited 2009 producing 4,300 boe/d (98% oil) based on field estimates.

Subsequent to December 31, 2009:

  • Received receipt on January 20, 2010 for a final prospectus filed with securities regulators in Canada to qualify Emerge shares for trading; began trading on the Toronto Stock Exchange on January 27, 2010 under the symbol "EME";
  • Established a capital budget of $55 million for 2010; based on oil price assumption of WTI US$75/bbl and includes 55 drills, 110 well reactivations, facilities upgrades and other expenditures; and
  • Increased current production to 5,200 boe/d based on field estimates from continued drilling and reactivation activities.

FINANCIAL AND OPERATIONAL HIGHLIGHTS

      Quarterly Summary       Annual Summary  
      Three month period ended       Year   Period  
  Dec. 31, 2009   Sep. 30, 2009   Jun. 30, 2009   Mar. 31, 2009   2009   2008(1)  
FINANCIAL ($000, except share                        
and per share amounts)                        
Petroleum and natural gas revenue 13,415   6,899   4,264   292   24,870   765  
Funds flow from operations(2) 2,363   1,872   967   (236 ) 4,966   (81 )
  Per share – basic and diluted ($)(2) 0.04   0.05   0.02   0.00   0.11   0.00  
Net loss (4,189 ) (941 ) (849 ) (496 ) (6,475 ) (568 )
  Per share – basic and diluted ($) (0.08 ) (0.03 ) (0.02 ) (0.01 ) (0.14 ) (0.01 )
Weighted average common shares(3)                        
  Basic and diluted(4) 56,056,622   41,700,100   41,700,100   41,700,100   45,318,730   41,662,769  
Securities outstanding(5)                        
  Common shares 50,200,100   41,700,100   41,700,100   41,700,100   50,200,100   41,700,100  
  Special warrants 32,775,000         32,775,000    
  Stock options 3,910,000   3,490,000   3,490,000   2,900,000   3,910,000   2,700,000  
E&D capital expenditures 12,018   9,596   3,971   1,069   26,654   557  
Total capital expenditures 100,991   9,722   4,212   25,137   140,062   3,584  
Net debt and working capital                        
(cash surplus) 15,725   5,282   (2,449 ) (5,622 ) 15,725   (28,587 )
Total credit facilities 37,500   7,000   4,500   700   37,500   700  
OPERATING (units as noted)                        
Daily average production                        
  Crude oil and NGLs (bbl/d) 2,232   1,121   653   69   1,025   103  
  Natural gas (mcf/d) 1,250   1,794   2,055   130   1,312    
  Total (boe/d) 2,440   1,420   966   91   1,244   103  
Average sales price                        
  Crude oil and NGLs ($/bbl) 62.78   62.07   60.31   38.62   61.78   54.79  
  Natural gas ($/mcf) 4.56   3.03   3.62   4.41   3.66    
  Total ($/boe) 59.75   52.82   47.03   35.61   54.78   54.79  
NETBACKS ($/boe)                        
  Petroleum and natural gas                        
  revenue 59.75   52.82   47.03   35.61   54.78   54.79  
  Royalties expense (13.26 ) (9.40 ) (7.72 ) (7.53 ) (10.94 ) (9.05 )
  Operating expense (25.60 ) (21.77 ) (20.80 ) (29.19 ) (23.60 ) (41.58 )
  Transportation expense (3.99 ) (3.21 ) (1.84 ) (2.82 ) (3.31 ) (1.58 )
  Operating netback (2) 16.90   18.44   16.67   (3.93 ) 16.93   2.58  
  Other income 0.39   0.59   0.94   13.42   0.79   21.88  
  General and administrative                        
  expense (6.48 ) (4.70 ) (6.95 ) (38.38 ) (6.64 ) (30.29 )
  Interest expense (0.29 )       (0.14 )  
  Funds flow netback (2) 10.52   14.33   10.66   (28.89 ) 10.94   (5.83 )

(1)Represents the Company's initial 136-day period of operations from August 18, 2008 to December 31, 2008.

(2) Management uses funds flow from operations, funds flow from operations per share, net debt and working capital, operating netback and funds flow netback to analyze operating performance, profitability and general financial strength. Funds flow from operations, funds flow from operations per share, net debt and working capital, operating netback and funds flow netback as presented do not have any standardized meaning under Canadian Generally Accepted Accounting Principles and therefore may not be comparable with the calculation of similar measures for other entities.

(3) In accordance with accounting guidelines, the weighted average number of special warrants outstanding is included in the calculation of weighted average basic common shares outstanding for the three months and year ended December 31, 2009.

(4) Due to the anti-dilutive effect of Emerge's net loss for all periods presented, the diluted number of shares is equivalent to the basic number of shares.

(5) At March 24, 2010, there are 82,975,100 common shares outstanding, no special warrants outstanding, and 6,305,000 stock options outstanding. All special warrants outstanding at December 31, 2009 were converted to common shares on January 21, 2010.

MESSAGE FROM THE PRESIDENT

The Company rounded out a successful 2009 with a busy fourth quarter on the corporate and operational fronts. We closed an equity financing with a syndicate of underwriters on November 19, 2009 of 32.775 million subscription receipts at $2.00 per subscription receipt for gross proceeds of $65.55 million pursuant to a private placement under prospectus exemptions. The net proceeds after underwriters' fees of $61.3 million were applied to our second significant acquisition of producing assets in the year, on November 30, 2009. Emerge successfully closed the acquisition of assets in our Lloydminster core area and in a new area of Battlebend, Alberta. The adjusted acquisition cost of $85.8 million was paid by a combination of $68.8 million in cash and $17.0 million in common shares (8.5 million common shares of Emerge valued at $2.00 per share). Acquisition highlights include:

  • 2,200 boe/d of production: 1,500 boe/d of heavy oil in Lloydminster, Saskatchewan and Alberta, and 700 boe/d of medium and light oil in the Battlebend area of east-central Alberta;
  • Lloydminster heavy oil production is over 98% working interest and operated;
  • Battlebend medium oil production is over 95% working interest and operated;
  • Numerous oil batteries, water disposal sites and an oil blending facility;
  • Extensive 2D and 3D seismic;
  • Approximately 47 net sections of land;
  • Over 200 standing and shut-in wells, representing opportunity for reactivation and recompletion;
  • Drilling inventory of 110-120 locations; and
  • 4.4 million boe of proved plus probable reserves.

In conjunction with the asset acquisition, Emerge established new credit facilities with a Canadian chartered bank, totaling $37.5 million. The facilities consist of a $30 million revolving operating line and a $7.5 million acquisition and development line. We have drawn on these facilities to complete the asset acquisition and to support our on-going capital program. Emerge exited 2009 with $15.7 million of combined bank debt and working capital deficiency.

Late in the fourth quarter of 2009, Emerge divested its non-strategic, non-operated Obed natural gas property, generating net proceeds of $6.6 million which we used to reduce bank debt.

To integrate the new properties and prepare for future growth of the Company, we added to our office and field staff, exiting the year with 22 full-time employees.

We also completed our 2009 drilling program in late December, where we achieved 100% success drilling 18 (18.0 net) wells in the Silverdale, Furness and Epping areas. The wells were all on production by late December and contributed to our 4,300 boe/d year-end exit rate and 2,440 boe/d average production rate for Q4 2009. Other Q4 2009 operational highlights include:

  • Invested $12 million of capital on the Company's drilling program, reactivation/optimization program and phase II completion of the Silverdale oil battery expansion;
  • With the Silverdale oil battery expansion, added 8,000 barrels of tankage, doubled injection capacity to 40,000 boe/d and upgraded recycle/skim pumps to accommodate production growth; and
  • Shot and acquired 70 kilometers of 2D seismic within the greater Lloydminster heavy oil area that is currently being interpreted to add to Emerge's existing drilling inventory of 210 locations.

Subsequent to year-end, on January 20, 2010, Emerge received a receipt for a final prospectus filed with securities regulators to qualify Emerge's common shares for distribution, including the issuance of 32.775 million common shares pursuant to the conversion of the Company's special warrants. The Company's common shares became listed for trading on the Toronto Stock Exchange ("TSX") under the trading symbol "EME" on January 27, 2010.

OPERATIONS UPDATE

Current production is approximately 5,200 boe/d based on field estimates, an increase of 900 boe/d or 21% from our 2009 exit rate of 4,300 boe/d. Production increases have been realized from a combination of the Company's drilling and well reactivation programs.

The Company has drilled 18 (18.0 net) wells to-date in 2010, resulting in 17 (17.0 net) heavy oil wells in the Silverdale, Furness and Epping areas of Lloydminster, and 1 (1.0 net) well drilled in the Fosterton area of southwest Saskatchewan which was drilled and abandoned.

All 17 heavy oil wells have been cased and 14 are on production at the date of this release, with the remaining 3 wells to be equipped and put on production in the coming weeks. Initial production rates on these new drills are averaging 40 bbl/d of oil. Additionally, 7 successful wells drilled in our Furness area discovered significant new multiple pay zones and partially outlined a new core production area adjacent to our Silverdale property.

The Company has also reactivated 25 standing wells to-date in 2010 in the Lloydminster area, primarily on the new properties acquired in November 2009, with early production gains totalling approximately 350 bbl/d of oil.

OUTLOOK

The Company's plans for the remainder of 2010 include:

  • Continue with our 2010 drilling program after spring break-up, where we plan to drill 55 locations in 2010. We plan to complete our drilling program by the end of Q3 2010 to take advantage of current drilling costs and allow for an expanded drilling program if commodity prices continue to strengthen;
  • Continue with our 2010 reactivation program of standing and shut-in wells, where we plan to complete 110 reactivations in 2010;
  • Implement, reconfigure and optimize our water-flood on the main Sparky oil pool at Silverdale on sections 6 and 31. An independent engineering firm has completed a major study on this pool and Emerge will direct $2 million of capital to convert the water-flood pattern of injection;
  • Kick-off phase III, the final phase, to revamp our Silverdale oil battery, including installation of a new free water knockout and new treater to handle production gains in 2010 and beyond; and
  • Construct a new 6-inch oil sales pipeline and lact shipping unit at our Silverdale oil battery. Currently all of Emerge's oil is trucked to third party sales points. This pipeline tie-in is expected to reduce operating costs by $3/bbl and reduce truck traffic in our Silverdale area.

Emerge anticipates average production of 5,400 to 5,600 boe/d for 2010, with a projected exit rate of 7,200 to 7,500 boe/d. Our capital budget for 2010 is set at $55 million, to be funded by a combination of cash flow and the Company's credit facility.

About Emerge Oil & Gas Inc.

Emerge is engaged in the exploration for and development and production of oil and natural gas in Western Canada. The Company currently operates within two principal areas, namely, the Lloydminster area of West-Central Saskatchewan and East-Central Alberta and the Battlebend area of East-Central Alberta. Emerge is headquartered in Calgary, Canada.

Barrel of Oil Equivalent

The Company may present petroleum and natural gas production and reserve volumes in barrel of oil equivalent ("boe") amounts. For purposes of computing such units, a conversion rate of 6,000 cubic feet of natural gas to one barrel of oil equivalent (6:1) is used. The conversion ratio of 6:1 is based on an energy equivalency conversion method which is primarily applicable at the burner tip and does not represent value equivalence at the wellhead. Readers are cautioned that boe figures may be misleading, particularly if used in isolation.

Forward-Looking Statements

Certain statements contained in this news release constitute "forward-looking statements" under applicable securities laws. These statements relate to future events or future performance and are based on the Company's current expectations, estimates, projections, assumptions and beliefs. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. Accordingly, undue reliance should not be placed on these forward-looking statements. The use of any of the words "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "project", "should", "believe", "plans", "intends" and similar expressions are intended to identify forward-looking statements. In particular, but without limiting the foregoing, this MD&A contains forward-looking information pertaining to the following: drilling plans and timing of drilling, completion, reactivation, workover and tie-in of wells; plans for facilities construction and timing of completion of such construction; anticipated production volumes and timing of commencement of production; drilling, completion, facility and other capital costs; methods of financing capital expenditures and ability to fund financial liabilities; supply and demand for the Company's products; prices for oil and natural gas, and in particular heavy oil; operating, general and administrative and other costs and expenses, and the Company's ability to reduce such costs; and expectations regarding the Company's ability to add reserves through exploration, development and acquisitions. All such forward-looking statements involve known and unknown risks and uncertainties, certain of which are beyond the control of the Company. Such risks and uncertainties include, without limitation: risks associated with oil and natural gas exploration, development, exploitation, production, transportation and marketing; general economic conditions in North America and globally; changes in the demand for Emerge's products; volatility in market prices for oil and gas, and in particular heavy oil; unanticipated fluctuations or declines in production; the effects of adverse weather conditions; changes in foreign currency exchange and interest rates; changes in tax or environmental laws, royalty rates or other regulatory matters affecting the Company and its operations; inaccurate estimation of Emerge's oil and natural gas reserves; ability to attract and retain qualified personnel; increased debt levels or debt service requirements; limited, unfavorable or lack of access to capital markets; and the impact of competitors. The forward-looking statements contained in this news release are made as of the date hereof and the Company does not intend, and does not assume any 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.

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