Mahalo Energy Ltd.

Mahalo Energy Ltd.

November 13, 2007 20:20 ET

Mahalo Energy Ltd.: News Release


Mahalo Energy Ltd. ("Mahalo" or the "Company") (TSX:CBM) is pleased to announce its results for the three and nine months ended September 30, 2007.

Summary of Results

Three Months Ended Nine Months Ended
Sept 30 Sept 30 Sept 30 Sept 30
2007 2006 2007 2006
($000's except per share)
Petroleum and natural
gas revenue 11,390 11,578 32,693 28,684
Operating netback (1) 5,693 5,612 17,150 14,984
Net income (loss) (1,813) (798) (3,020) (1,054)
Per share - basic &
diluted (0.03) (0.01) (0.05) (0.02)
Funds from
operations (1) 3,334 3,434 10,372 11,402
Per share
- basic (1) 0.06 0.06 0.18 0.23
expenditures (2) 13,540 20,781 35,723 147,139
Proceeds from sale
of oil and gas
assets 2,235 17,004 16,509 17,004
Net debt, end of
period (1) 59,607 53,452 59,607 53,452

Average daily sales
volumes (boe) (1) 3,407 2,939 2,948 2,312
Average selling
price ($/boe) 36.34 42.82 40.62 45.45
netback ($/boe) 18.16 20.76 21.30 23.74

(1) Refer to advisories regarding non-GAAP financial measures.
(2) Corporate and property acquisitions include deemed value of non-cash

Q3 2007 Highlights

- Realized average daily oil and gas sales of 3,407 boe in third quarter 2007 with September's average rate being 3,500 boe per day and September exit at 3,550 boe per day, a Company record.

- Reduced operating costs below $7.00 per boe.

- Reduced general and administrative expense to $4.21 per boe.

- Assumed full operatorship of the Poteau field in Oklahoma.


Mahalo generated funds from operations of $3.3 million on sales of $11.4 million and recorded a net loss of $1.8 million in an environment of continued softness in natural gas prices during the three months ended September 30, 2007.


Mahalo is pleased to present operational and financial results that emphasize the benefits of a successful asset base managed by a competent team of skilled, committed professionals. Although we were still plagued by low natural gas prices in the third quarter, we demonstrated significant production growth, reduction in operating costs per boe and lower general and administrative expenses. Despite the downward pressure applied to gas, we have a drilling portfolio that was and can be called upon to produce results even when wellhead prices are depressed. Mahalo is actively operating prospects in both Canada and the United States, including the Poteau field in Oklahoma, and continues to benefit from a strong relationship with partners who operate a certain number of our prospects. This brings a better balance to our overall resource management.

The Company averaged 3,407 boe per day of oil and gas sales, primarily CBM natural gas, during third quarter 2007. This represents a 21 percent increase over the preceding quarter. The previously announced expansion of the Kayla West pipeline transportation system freed up constrained production from a number of Hartshorne CBM wells in the United States. This fully commissioned gathering system, together with additional Canadian drilling success of both unconventional and conventional prospects, has allowed the Company to exit the third quarter with record oil and gas sales volumes of approximately 3,550 boe per day.

The Company was active through third quarter 2007 with the selective drilling of 44 (27 net) wells. In the third quarter, we drilled 13 (9.7 net) wells. We drilled Canadian Mannville CBM horizontals, US Hartshorne CBM horizontals, US Woodford Shale wells and also participated in some seismically determined conventional prospects.

The on-going development of the Hartshorne coal was a primary objective in the third quarter. Mahalo drilled 7 Hartshorne coal wells in the Lakeview area during this period. Three of the wells were operated by Mahalo.

During third quarter 2007, Mahalo drilled a 64 per cent owned Woodford Shale horizontal well in Hughes County, Oklahoma. Although the well was cased, completion is being deferred pending higher natural gas prices. The well will be stimulated utilizing a multi-stage high-volume stimulation program.

In Canada, our drilling portfolio showed that certain shallow prospects in one of our West Central Alberta fields were ideal to be drilled during the third quarter due to the availability of lower cost services and infrastructure. The Company drilled 4 (3.8 net) wells. Three of these wells are currently producing; the fourth well encountered a mud filtrate problem and is scheduled for remedial work in early 2008.

Mahalo continues to focus its Canadian CBM efforts at its Corbett Creek, Alberta property. Our primary focus is to expedite the dewatering phase of exploiting this massive resource. Earlier this year, the Company re-entered an existing well producing from the Mannville through a single horizontal lateral and subsequently completed the well as a multi-lateral, three legged producer. Productivity is stable at 1.0 Mmcf per day. The dewatering time has improved noticeably; the original dewatering time was estimated at 3 to 6 months. The multi-lateral well delivered CBM production within 6 weeks.

As reported last quarter, Mahalo re-entered a second well at Corbett Creek, drilled an additional two lateral legs and brought the well back on production in mid-July. This second multi-lateral well has now had adequate time to display a production trend that appears to be similar to the first well; a noticeable improvement in accelerated dewatering and CBM production capability. The Company is encouraged by the recent results at Corbett Creek and with existing infrastructure already in place to support related reserves and expedited production, Corbett activity is practically a must do project for our 2008 budget.


Mahalo continues to strategically plan its 2007 activity around a Cdn $38 million capital expenditure program of which approximately Cdn $33 million was spent through the third quarter. Our 2007 production exit target of 3,800 boe per day appears to be reachable with less capital than anticipated; consequently, our current mandate is to identify and execute projects that will achieve our exit target and, at the same time, allow us to under spend our approved 2007 capital budget.

Projects that will be instrumental in the formulation of our 2008 capital program include the drilling of a Hartshorne CBM multi-lateral well in fourth quarter 2007, which if successful, should allow us to further improve our Hartshorne CBM economics and reduce related finding and development costs.

The Company will also continue to examine farm-in offers for the development of shale drilling prospects within our acreage that can assist us in determining the resource potential sitting beneath our lands. The ability for Mahalo to participate directly in drilling notices will require careful consideration due to the capital magnitude of such development. In addition, to encouraging drilling activity within our own acreage, the development activity surrounding Mahalo's shale lands is providing the Company with good insight into third party technical successes and adding value in the Company's on-going assessment of this large resource.

Mahalo is currently assessing the Alberta government's revised oil and gas royalty framework which will become effective January 2009. Initial indications are that Mahalo's royalties would not increase and may in fact decrease under the new royalty framework given our focus on CBM development and current commodity price assumptions.

Mahalo is currently in negotiations to divest of certain additional non-core assets. Key objectives include monetizing additional non-core assets, reducing outstanding bank debt while maintaining our current approved borrowing base despite the asset sales. This will better position Mahalo to continue its United States Hartshorne CBM development program, further refine its approach to Canadian Mannville CBM, and build on shale gas development success enjoyed by others within close proximity to its Oklahoma shale holdings.

Additional Information

Mahalo's unaudited consolidated financial statements and related managements' discussion and analysis for the three and nine months ended September 30, 2007 have been filed on SEDAR at For additional information on the Company, please go to the Company's profile on SEDAR or the Company's website at

Mahalo is a junior, unconventional natural gas producer, focusing on the development and production of coal bed methane and shale gas prospects in the United States and coal bed methane in Canada.


Forward-looking Statements - Certain matters discussed in this document may be considered forward-looking statements. Such statements include declarations regarding management's intent, belief or current expectations. Such statements include declarations regarding management's intent, belief or current expectations. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties; actual results could differ materially from those indicated by such forward-looking statements. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: (i) that the information is of a preliminary nature and may be subject to further adjustment, (ii) the possible unavailability of financing, (iii) risks related to the exploration and development of oil and gas properties, (iv) the impact of price fluctuations and the demand and pricing for oil and natural gas, (v) the seasonal nature of the business, (vi) start-up risks, (vii) general operating risks, (viii) dependence on third parties, (ix) changes in government regulation, (x) the effects of competition, (xi) dependence on senior management, (xii) impact of economic conditions, and (xiii) fluctuations in currency exchange rates and interest rates. Mahalo undertakes no obligation to update or revise any forward-looking statements, except as required by law.

Non-GAAP Financial Measures - The terms "funds from operations", "funds from operations per share, "operating netback "and "net debt" are not recognized measures under Canadian Generally Accepted Accounting Principles ("GAAP") and are therefore referred to as non-GAAP financial measures. Funds from operations represent cash from operating activities before change in related non-cash working capital. Operating netbacks are calculated by subtracting royalties and operating and transportation costs from sales revenues. Net debt as calculated by the Company represents long-term debt less working capital (excluding unrealized gain or loss on financial instruments). Management believes that these non-GAAP measures are useful supplemental measures to provide shareholders and potential investors with additional information regarding the Company's liquidity, operating performance and ability to generate funds to finance its operations. The Company's method of calculating these measures may differ from other companies and accordingly, they may not be comparable to measures used by other companies. These measures should not be construed as an alternative to net earnings, as determined in accordance with GAAP, as an indication of the Company's performance.

Barrel of Oil Equivalent Measures - Disclosure provided herein in respect of barrel of oil equivalent ("boe") units may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet of natural gas to one barrel of oil is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Contact Information

  • Mahalo Energy Ltd.
    Duncan Chisholm
    President & CEO
    Direct: (403) 716-3114
    (403) 451-3501 (FAX)
    Mahalo Energy Ltd.
    Bill Gallacher
    Chairman of the Board
    Direct: (403) 233-4451
    Mahalo Energy Ltd.
    540, 734 - 7th Avenue SW
    Calgary, Alberta T2P 3P8
    (403) 451-3500