May 12, 2006 19:42 ET

Oilexco Announces First Quarter Results

CALGARY, ALBERTA--(CCNMatthews - May 12, 2006) - Oilexco Incorporated ("Oilexco") (TSX:OIL) (AIM:OIL) is pleased to announce its first quarter results for the period ending March 31, 2006.

In first quarter of 2006 Oilexco maintained its UK North Sea exploration and appraisal drilling program. The Company drilled two exploration wells at Palomino (84.21% of drilling costs for 50% WI) and Joy (100% owned prospect at 15/25c block), which were unsuccessful in intersecting commercial volumes of hydrocarbons. Oilexco plans to continue its exploration and appraisal drilling program in further quarters of 2006 by continuing to fully utilize the Transocean Sedco 712 semi-submersible drilling rig, which is under long-term contract until March 2008, and the Bredford Dolphin semi-submersible drilling rig, which is under a short-term three-well contract.

Parallel to its UK North Sea exploration and appraisal drilling program, the Company also focused its efforts on the development of its 100% owned Brenda, and 70% owned Nicol oil fields. During the first quarter of 2006, two production wells were drilled at the Brenda field. In January 2006, to facilitate the development projects, the Company signed debt facilities with the Royal Bank of Scotland ("RBS") totalling $245.0 million to fully fund development of the Brenda and Nicol oil fields.

Oilexco finished the first quarter of 2006 in excellent financial condition. The Company had significant cash balances as at March 31, 2006 as a result of an equity financing that closed in December 2005 and draws from the RBS loan facility. Capital assets increased from $197.0 million at December 31, 2005 to $245.7 million at March 31, 2006 as a result of drilling two exploration wells, two production wells and additions to the subsea equipment for the Brenda and Nicol development. Current liabilities increased from $41.9 million at December 31, 2005 to $50.8 million at March 31, 2006, represented by a $26.1 million increase in accounts payable and accrued liabilities, and a $17.2 million decrease in the current portion of the bank loan (due to repayment of the Bridge Facility that was replaced with long-term senior debt from RBS). The long-term debt as at March 31, 2006 amounted to $68.2 million and relates to the Senior Facility. The Company expects its bank indebtedness to increase by the end of 2006 near the maximum limit of its credit facility. Working capital was approximately $93.7 million as at March 31, 2006 compared to $89.1 million at December 31, 2005. The increase in share capital of approximately $6.1 million represents funds obtained from warrants and stock options exercised in the first quarter of 2006. The Company's 2006 UK North Sea exploration and appraisal drilling program will be fully funded by its cash reserves. The Brenda/Nicol development is funded by the Senior Facility from RBS.

Operating results for the first quarter were lower in 2006 compared to the first quarter of 2005. The decrease in UK production was a result of maintenance work completed on the Balmoral facility, however increased oil prices helped offset reduced production. The price received for UK oil production for the first three months of 2006 averaged $61.66 per barrel compared to $47.01 for the same period in 2005. While total operating costs at the Balmoral facility in the first quarter 2006 were similar to those of the first quarter of 2005, the per barrel costs were significantly higher. The increase in the per barrel cost was due to the decreased production in 2006. The per unit operating costs will decline dramatically when the Brenda/Nicol production begins later in the fourth quarter of 2006.

General and administrative expenses increased significantly in the first quarter of 2006 compared to 2005 because of increases in staffing levels in both Oilexco's head office in Calgary and its wholly owned subsidiary in Aberdeen. The additional expenses are a result of salaries, support and activity required for the Brenda/Nicol development and the ongoing exploration and appraisal drilling program. General and administrative expenses are expected to continue to rise somewhat throughout 2006, though not as sharply as in previous periods. A stock-based compensation expense of $0.6 million was realized in the first three months of 2006, which is 25% lower than the same period in 2005. The Company continues its compensation policy of combining share options with competitive salaries and benefits packages in order to attract the best qualified staff.

As part of its loan facility agreement with RBS, the Company participated in commodity contracts that involve a costless collar agreement to secure the Company's future cash flow by eliminating its exposure to oil prices below $40 per barrel for a portion of the anticipated production from Brenda and Nicol. As a result of oil prices at March 31, 2006 compared to those of January 25, 2006, the date at which the commodity contracts were signed, the Company recorded an unrealized loss of $10.4 million in its financial statements. This is a non cash item. The commodity contracts will not have a negative impact on the Company's cash flow unless the price of dated Brent exceeds a monthly average of $88 per barrel during the life of the commodity contracts. In the case where oil prices persist above $88 per barrel, the Company has the ability to mitigate future reductions in revenue by altering the terms of the commodity contracts.

The Company realized a $12.5 million impairment of capital assets in the first quarter of 2006 as a result of unsuccessful drilling results for the wells at Palomino and Joy. This figure is calculated based upon the fair value of proved and probable reserves in the Balmoral Field. No such impairment was realized for the corresponding period in 2005. The impairment does not apply to the Brenda and Nicol full cost asset base, as they are not yet on production, and therefore excluded from the UK full cost centre.

The Company experienced a net loss of $26.1 million for the first quarter of 2006 compared to a $1.6 million net loss for the corresponding period in 2005. The sharp increase in the 2006 net loss is a result of approximately $10.4 million unrealized loss on derivative contracts, $12.5 million impairment of capital assets from the wells drilled at Palomino and Joy, $0.8 million increase in general and administrative expenses and the increase in depletion expense of $0.4 million.

As anticipated, cash flows from operating activities were negative in the first quarter of 2006, compared to the corresponding period in 2005 as the Company's general and administrative expenses increased. It is expected that this trend will continue until oil production from Brenda and Nicol begins sometime in the fourth quarter of 2006.

Complete disclosure of the Company's First Quarter Interim Report as at March 31, 2006 is available on SEDAR at www.sedar.com.

Forward Looking Statements

This disclosure contains certain forward-looking statements that involve substantial known and unknown risks and uncertainties, certain of which are beyond Oilexco's control, including: the impact of general economic conditions in the areas in which Oilexco operates, civil unrest, industry conditions, changes in laws and regulations including the adoption of new environmental laws and regulations and changes in how they are interpreted and enforced, increased competition, the lack of availability of qualified personnel or management, fluctuations in commodity prices, foreign exchange or interest rates, stock market volatility and obtaining required approvals of regulatory authorities. In addition there are risks and uncertainties associated with oil and gas operations, therefore Oilexco's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements will transpire or occur, or if any of them do so, what benefits, including the amounts of proceeds, which Oilexco will derive therefrom. All statements included in this press release that address activities, events or developments that Oilexco expects, believes or anticipates will or may occur in the future are forward-looking statements. These statements include future production rates, completion and production timetables and costs to complete wells, and production facilities. These statements are based on assumptions made by Oilexco based on its experience perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances.

Oilexco is listed on the Alternative Investment Market of the London Stock Exchange plc and the Toronto Stock Exchange, in each case trading under the symbol OIL.

Contact Information

  • Oilexco Incorporated
    Arthur S. Millholland
    (403) 262-5441
    Oilexco Incorporated
    Brian L. Ward
    Chief Financial Officer
    (403) 262-5441
    Oilexco Incorporated
    Gerry L. Roe
    Chief Operating Officer
    (403) 262-5441
    Oilexco Incorporated
    Rob Elgie
    Manager Investor Relations
    (403) 262-5441