Veteran Resources Inc.
TSX : VTI

Veteran Resources Inc.

May 13, 2005 08:19 ET

Veteran Resources Inc. Announces 2005 First Quarter Results and an 86 Percent Increase in Reserves Over December 31, 2004

CALGARY, ALBERTA--(CCNMatthews - May 13, 2005) - Veteran Resources Inc. (TSX:VTI) ("Veteran" or the "Company")is pleased to provide its first quarter, 2005 financial results as well as an update on reserves and activity.

First Quarter Highlights

- Spent $10.0 million and drilled 13 wells with 73 percent success rate

- Added 2,169 Mboe (thousand barrels of oil equivalent) in proved plus probable reserves, an 86 percent increase from year-end

- Increase net asset value of the Company to $0.95 per share basic and $0.92 per share fully diluted

- Entered into 131 square mile joint venture in the Cecil, Alberta area

Reserves Update

Momentum from the exploration program initiated in the fourth quarter of 2004 continued into 2005 with the drilling of 13 (8.7 net) wells. We achieved further drilling success in our focus areas of Cecil, Earring and Gunnell resulting in significant reserve additions. The reserve additions were deemed sufficiently material by the Company that its independent engineers, Sproule Associates Limited, were engaged to provide a new report effective April 30, 2005.

As a result, total proved reserves increased by 1,476 Mboe, a 76 percent increase from December 31, 2004, to 3,406 Mboe representing a net present value before income taxes, discounted at ten percent, of $54.4 million. These reserves include infill drilling locations at Cecil and Gunnell designated as proved undeveloped reserves in the amount of 950 Mboe. These reserves will require $6.5 million in capital to develop and have been accounted for in the evaluation. These low risk development locations are budgeted to be drilled during the remainder of 2005 with those requiring winter access conditions extending into the first quarter of 2006.

Total proved plus probable reserves increased by 2,169 Mboe, an 86 percent increase, to 4,705 Mboe representing a net present value before income taxes, discounted at ten percent, of $69.7 million. Probable reserves include 263 Mboe of undeveloped reserves associated with the previously mentioned proved undeveloped reserves but require no additional capital.

The report employs three different methodologies related to the activity level of each producing property. The Cecil area, since it is in the early stages of development, was completely re-evaluated to recognize all drilling and production to date. The Gunnell and Watch/Plante areas were partially re-evaluated to reflect first quarter drilling and the onset of new production. The previously existing Gunnell and Watch/Plante wells and the Company's remaining producing properties, none of which had experienced recent drilling activity, were "mechanically updated" to account for four months of 2005 production. The Company's net reserves and values, based on forecast prices and costs, are summarized in the tables below.



Summary of Oil and Gas Reserves - Gross(1) and Net(2)
As of April 30, 2005
Forecast Prices and Costs

------------------------------------------------------------------------
Reserves Light and Natural Gas
Category Medium Oil
-------------------------------------------
Gross Net Gross Net
(Mbbl) (Mbbl) (MMcf) (MMcf)
------------------------------------------------------------------------
Proved
Producing 806.7 713.1 4,439 3,951
Non-producing 12.4 10.9 648 546
Undeveloped 546.1 440.2 6,695 4,956
------------------------------------------------------------------------
Total Proved 1,365.2 1,164.2 11,782 9,453
Probable 447.5 365.7 4,953 4,031
------------------------------------------------------------------------
Total Proved plus Probable 1,812.7 1,529.9 16,735 13,484
------------------------------------------------------------------------



------------------------------------------------------------------------
Reserves Natural Gas Barrels of Oil
Category Liquids Equivalent(3)
-------------------------------------------
Gross Net Gross Net
(Mbbl) (Mbbl) (Mboe) (Mboe)
------------------------------------------------------------------------
Proved
Producing 56.9 56.3 1,603.5 1,427.8
Non-producing 1.7 1.1 122.3 102.8
Undeveloped 18.3 17.5 1,680.1 1,283.6
------------------------------------------------------------------------
Total Proved 76.9 74.9 3,405.9 2,814.2
Probable 25.8 22.1 1,298.9 1,059.6
------------------------------------------------------------------------
Total Proved plus Probable 102.7 97.0 4,704.8 3,873.8
------------------------------------------------------------------------

Notes:
(1) "Gross reserves" are the Corporation's working interest share of
reserves before the deduction of royalties.
(2) "Net reserves" are defined as the "gross reserves" of the
properties in which the Corporation has an interest, less all
interests and royalties owned by others but including all gross
overriding royalties owned by the Company.
(3) Reserves are commonly stated in barrels of oil equivalent "boe"
using a six-to-one conversion basis when converting thousands of
cubic feet of natural gas to barrels of oil and a one-to-one
conversion basis for natural gas liquids to oil. Such conversions
may be misleading, particularly if used in isolation. A six-to-one
conversion ratio is based on energy equivalence between natural gas
and oil at the burner tip and does not represent economic
equivalence of products at the wellhead or point of sale.


Net Present Values of Future Net Revenue
As of April 30, 2005
Forecast Prices and Costs

------------------------------------------------------------------------
Reserves Future Net Revenue Before Taxes (1)
Category Discounted at %/year
----------------------------------------
0 5 10 15 20
------------------------------------------------------------------------
Proved
Producing 45,281 36,661 31,118 27,261 24,417
Non-producing 3,051 2,092 1,623 1,354 1,179
Undeveloped 36,909 27,491 21,702 17,823 15,051
------------------------------------------------------------------------
Total Proved 85,241 66,244 54,443 46,438 40,647
Probable 33,935 21,454 15,305 11,783 9,542
------------------------------------------------------------------------
Total Proved plus Probable 119,176 87,698 69,748 58,221 50,189
------------------------------------------------------------------------

Notes:
(1) Net Revenue prior to provision of income taxes, interest, debt
service charges and general and administrative expenses. It should
not be assumed that the undiscounted and discounted future net
revenues estimated by Sproule Associates represent the fair market
value of the reserves.


Pricing Assumptions

The forecast prices that formed the basis for the forecast reserves and revenue projections were based on Sproule's April 30, 2005 pricing model.



Summary of Future Pricing
Sproule Associates April 30, 2005
Forecast Prices

------------------------------------------------------------------------
Edmonton Natural
WTI Cushing Par Price Gas AECO
Year Oklahoma 40 degrees API Gas Price
------------------------------------------------------------------------
($US/bbl) ($Cdn/bbl) ($Cdn/MMBtu)
------------------------------------------------------------------------
2005 (8mo Est) 55.42 66.10 8.26
2006 54.17 64.58 8.20
2007 49.51 58.88 7.35
2008 43.92 52.04 6.62
2009 42.45 (1) 50.24 (1) 6.39 (1)
------------------------------------------------------------------------

Notes:
(1) escalation rate of 1.5% thereafter


Reserves Reconciliation
As of April 30, 2005
Forecast Prices and Costs

------------------------------------------------------------------------
Light, Medium
and Heavy Oil Natural Gas Liquids
(Mbbl) (Mbbl)
------------------------------------------------------------------------
Proved Probable P+P Proved Probable P+P
------------------------------------------------------------------------
Dec 31/04 498.0 170.5 668.5 54.7 15.3 70.0
------------------------------------------------------------------------
Extensions 440.2 97.8 538.0 13.2 3.6 16.8
Discoveries 207.6 46.9 254.5 8.5 2.7 11.2
Technical
Revisions 48.8 50.5 99.3 2.7 0.5 3.2
Acquisitions - - - - - -
Dispositions - - - - - -
Economic
Factors - - - - - -
Production (30.5) - (30.5) (4.2) - (4.2)
------------------------------------------------------------------------
Apr 30/05 1,164.1 365.7 1,529.8 74.9 22.1 97.0
------------------------------------------------------------------------



------------------------------------------------------------------------
Associated & Unassociated Gas
(MMcf)
------------------------------------------------------------------------
Proved Probable P+P
------------------------------------------------------------------------
Dec 31/04 6,567.0 2,040.0 8,607.0
------------------------------------------------------------------------
Extensions 1,697.0 538.0 2,235.0
Discoveries 1,289.4 1,556.4 2,845.8
Technical Revisions 305.1 (103.4) 201.7
Acquisitions - - -
Dispositions - - -
Economic Factors - - -
Production (407.5) - (407.5)
------------------------------------------------------------------------
Apr 30/05 9,451.0 4,031.0 13,482.0
------------------------------------------------------------------------

Notes:

(1) NI 51-101 specifies that year over year changes in reserves be
reported on a "Net" basis. "Net reserves" are defined as the "Gross
reserves" of the properties in which the Corporation has an
interest, less all interests and royalties owned by others but
including all gross overriding royalties owned by the Company.

(2) Reserves and production are commonly stated in barrels of oil
equivalent "boe" using a six-to-one conversion basis when
converting thousands of cubic feet of natural gas to barrels of
oil and a one-to-one conversion basis for natural gas liquids to
oil. Such conversions may be misleading, particularly if used in
isolation. A six-to-one conversion ratio is based on energy
equivalence between natural gas and oil at the burner tip and
does not represent economic equivalence of products at the wellhead
or point of sale.


Based on the foregoing, the current net asset value of the Company is as follows.



Net Asset Value
Total Proved + Probable $69.7 million
Undeveloped Land (1) 5.6 million
Unclaimed American Leduc Deposit (2) 0.7 million
Total Debt (March 31, 2005) (16.3 million)
----------------
Net Asset Value (PV10) $59.7 million

NAV Per Share
Basic (62.9 million shares) $ 0.95
Fully Diluted (68.1 million shares) $ 0.92


Notes:
(1) The undeveloped land value is based on the independent evaluation
by Standard land Company Inc. and Seaton-Jordon and Associates Ltd.
reported effective December 31, 2004
(2) Relates to the cash on deposit with Computershare Trust Company of
Canada with regards to the acquisition by Veteran of American Leduc
Petroleums Limited. The balance of the deposit, currently amounting
to $747,000, will be returned to Veteran on October 17, 2005 for
any American Leduc shares not tendered by that time.


Exploration Joint Venture

Veteran is pleased to announce that it entered into an exploration joint venture (JV) encompassing 131 sections of land, located south of its Cecil property. The lands were targeted by Veteran as potential for expansion of its Cecil and Earring play types. The JV is with a company of similar size and exploration philosophy as Veteran and provides the Company with free access to 126 square miles of three dimensional (3D) seismic. By partnering with another aggressive exploration company, we eliminate a potential competitor while increasing our own competitiveness through diversified risk in an area of high land prices. Access to the large 3D seismic base will accelerate prospect development through to the drilling stage.

At present, neither company has land within the JV although pending expiries and open Crown land offer ample opportunity to grow a sizable land base. In total, 25 sections of third party land will expire during the next 18 months while there are 67 sections of open Crown lands which will be evaluated for future postings. Both companies have already initiated discussions with potential farm in candidates.

The partner will operate, and assume 60 percent working interest, in future activity related to 84 sections of land, that is primarily associated with the 126 square mile 3D seismic program. Veteran will operate with a 50 percent working interest in the remaining 47 sections, which are not covered by 3D seismic.

Veteran has no financial commitment within the JV but intends to expand the 2005 budget by a minimum of $5 million to accommodate additional seismic and drilling activity. A new 3D seismic program covering approximately 20 square miles, or half the Veteran operated lands, is scheduled to commence after spring break-up.

Activity Update

Daily production now exceeds 1,100 boe per day while 900 boe per day remains tested and awaiting tie-in. Wet ground conditions continue to restrict access to Earring and Cecil, the areas containing most of the behind pipe production. Construction crews are presently in the field removing surface water in order to expedite the building of access roads. It is anticipated that approximately 650 boe per day of the behind pipe production will be producing by the end of the second quarter.

Cecil, AB

All three (1.5 net) wells drilled this winter are now on production at rates restricted to 125 boe per day for each well. Veteran's net production for Cecil now totals 220 boe per day. An application is before the Energy Board that would remove the production limits on most of the Cecil wells. Later in the second quarter, when access restrictions have been removed, a four (2.0 net) well drilling program will commence. Three of these wells are infill development locations while the fourth is a step-out which, if successful, could provide further development locations to be drilled later this year.

Earring, AB

Production from both Earring wells remains shut-in, but operations have commenced that should result in approximately 500 boe per day flowing by the end of June. A reservoir stimulation of a lower Triassic zone, that appears to be oil bearing, will occur in the same time frame and, if successful, will lead to several development locations. In anticipation of this outcome, two locations have been licensed which may be drilled later in 2005.

Gunnell, BC

The three wells drilled this winter have been pipelined and total net production amounts to 425 boe per day. Pipeline back pressure is starting to abate which should start to result in a net rate increase. The three wells appear to be among the best of the approximately 400 wells drilled to date in the general area. This is a testimony to the successful use of 3D seismic for the first time on this play. Based on these encouraging results we expect to participate in the drilling of three to five wells commencing late in 2005.

Outlook

To date we have spent just over 60 percent of our 2005 budget and still have eight wells to drill by year-end. Summer operations will concentrate on drilling at Cecil while actively pursuing Crown sales and farm ins under the joint venture.

Veteran's strategy of rationalizing non-core assets was initiated in April, 2005 with the sale of approximately 25 boe per day, at Barons, Alberta, for $1.3 million. The Company will continue to rationalize its non-core assets, by sale or swap, for production or re-investment in the Peace River Arch area.

We are still confident of achieving our 2005 forecasts not withstanding delays experienced in bringing on production. Production is expected to average 1,300 to 1,400 boe per day for 2005 translating into approximately $13 million in cash flow. We also still expect to exit 2005 at 1,900 boe per day.



HIGHLIGHTS

For the three months ended March 31, 2005 2004 Change
-----------------------------------------------------------------------

FINANCIAL
Oil and natural gas revenues $ 3,720,277 $ 1,923,042 93%

Funds from operations (1) $ 1,905,254 $ 929,045 105%
Per common share - basic $ 0.03 $ 0.02
Per common share - diluted $ 0.03 $ 0.02

Net earnings (loss) $ 485,650 $ (69,846) 795%
Per common share - basic $ 0.01 $ -
Per common share - diluted $ 0.01 $ -

Capital expenditures -
Capital assets, net $10,015,612 $ 2,675,850 274%

Working capital deficiency,
including bank loan $16,334,584 $ 4,602,318 255%

Shareholders' equity $24,016,132 $21,842,556 10%

Common shares outstanding
December 31
Basic 62,883,706 57,923,706 9%
Weighted average - basic 62,153,373 57,885,990 7%
Diluted 68,139,706 67,903,869 0%

OPERATIONS
Average daily sales
Natural gas (mcf per day) 3,328 1,517 119%
Crude oil (bbl per day) 252 225 12%
Natural gas liquids (bbl per day) 41 14 193%
Barrels of oil equivalent
(boe per day) 848 492 72%

Average sales price
Natural gas (per mcf) $ 7.54 $ 6.77 11%
Crude oil (per bbl) $ 55.66 $ 45.01 24%
Natural gas liquids (per bbl) $ 53.34 $ 50.88 5%

Netback pricing
(per barrel of oil equivalent)
Oil and natural gas revenues $ 48.76 $ 42.94 14%
Royalties $ (6.90) $ (5.99) 15%
Production $ (10.19) $ (7.91) 29%
----------------------------------
$ 31.67 $ 29.04 9%
----------------------------------
----------------------------------

-----------------------------------------------------------------------
Wells drilled
Gross 13 6
Net 8.38 1.04
Success rate 73% 67%
-----------------------------------------------------------------------

(1) Funds from operations is a non-GAAP measure that represents cash
generated from operating activities before changes in non-cash
working capital and is used by the Company to analyze operating
performance, leverage and liquidity. Funds from operations may
not be comparable to similar measures used by other companies.

Conversion

Boe's are derived by converting natural gas to oil in the ratio of 6
mcf : 1 bbl. Boe's may be misleading, particularly if used in isolation.
A boe conversion ratio of 6 mcf : 1 bbl is based on an energy
equivalency conversion method primarily applicable at the burner tip
and does not represent an equivalency at the wellhead.


BALANCE SHEETS

As at March 31, 2005 December 31, 2004
------------------------------------------------------------------------
(Unaudited) (Unaudited)

ASSETS

Current

Accounts receivable $ 4,409,287 $ 3,076,374
Prepaid expenses 176,894 134,755
------------------------------------------------------------------------

4,586,181 3,211,129

Capital assets (Note 2) 43,588,354 34,436,786
------------------------------------------------------------------------

$ 48,174,535 $ 37,647,915
------------------------------------------------------------------------
------------------------------------------------------------------------

LIABILITIES

Current
Bank overdraft $ 4,131,421 $ 254,684
Accounts payable and
accrued liabilities 9,586,344 5,957,296
Bank loan (Note 3) 7,203,000 5,528,000
------------------------------------------------------------------------

20,920,765 11,739,980

Asset retirement obligations (Note 4) 1,583,549 1,670,088

Future income taxes 1,654,089 1,101,272

Contingencies (Note 9)

SHAREHOLDERS' EQUITY
Share capital (Note 5) 21,920,814 21,702,999
Contributed surplus (Note 6) 480,869 304,777
Retained earnings (Note 5) 1,614,449 1,128,799
------------------------------------------------------------------------

24,016,132 23,136,575
------------------------------------------------------------------------

$ 48,174,535 $ 37,647,915
------------------------------------------------------------------------
------------------------------------------------------------------------


STATEMENTS OF EARNINGS AND RETAINED EARNINGS (DEFICIT)


For the three months ended March 31 2005 2004
------------------------------------------------------------------------
(Unaudited) (Unaudited)

REVENUES
Oil and natural gas $ 3,720,277 $ 1,923,042
Royalties, net of ARTC (526,039) (268,479)
------------------------------------------------------------------------
3,194,238 1,654,563

EXPENSES
Production 777,394 354,123
General and administrative 582,287 364,463
Financing charges 105,395 51,704
Depletion, depreciation and accretion 917,630 941,119
------------------------------------------------------------------------
2,382,706 1,711,409
------------------------------------------------------------------------
Earnings (loss) before taxes 811,532 (56,846)

Capital taxes - 13,000
Future income taxes (Note 7) 325,882 -
------------------------------------------------------------------------
325,882 13,000
------------------------------------------------------------------------

Net earnings (loss) for the period 485,650 (69,846)
Retained earnings (deficit),
beginning of period 1,128,799 (6,844,903)
Elimination of deficit through
reduction of share capital (note 5) - 6,844,903
------------------------------------------------------------------------
Retained earnings (deficit),
end of period $ 1,614,449 $ (69,846)
------------------------------------------------------------------------
------------------------------------------------------------------------

Earnings per common share
(Notes 5 and 6)
Basic $ 0.01 $ -
------------------------------------------------------------------------
------------------------------------------------------------------------
Diluted $ 0.01 $ -
------------------------------------------------------------------------
------------------------------------------------------------------------


STATEMENTS OF CASH FLOWS

For the three months ended March 31 2005 2004
------------------------------------------------------------------------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES

Net earnings for the period $ 485,650 $ (69,846)
Non-cash items
Stock-based compensation 176,092 57,772
Depletion, depreciation and accretion 917,630 941,119
Future income taxes 325,882 -
------------------------------------------------------------------------
Funds from operations 1,905,254 929,045
Expenditures on asset retirements (140,125) -
Changes in non-cash working capital (890,692) 312,997
------------------------------------------------------------------------
874,437 1,242,042
------------------------------------------------------------------------

FINANCING ACTIVITIES
Bank loan 1,675,000 2,475,000
Proceeds on issuance of common shares 444,750 37,960
------------------------------------------------------------------------
2,119,750 2,512,960
------------------------------------------------------------------------

INVESTING ACTIVITIES
Capital asset additions (10,015,612) (2,675,850)
Changes in non-cash working capital 3,144,688 (743,827)
------------------------------------------------------------------------
(6,870,924) (3,419,677)

Increase (decrease) in cash (3,876,737) 335,325
Cash (bank overdraft),
beginning of period (254,684) 330,231
------------------------------------------------------------------------
Cash (bank overdraft),
end of period $ (4,131,421) $ 665,556
------------------------------------------------------------------------
------------------------------------------------------------------------

Cash taxes $ - $ -
Interest paid $ 105,395 $ 50,297


Caution to Reader

This report contains forward-looking statements and the reader is cautioned not to place undue reliance on these statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur. Although Veteran believes that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. These statements are based on current expectations that involve a number of risks and uncertainties including but not limited to: the risks associated with the oil and gas industry (e.g., operational risks in development, exploration, and production; the uncertainty of reserve estimations; the uncertainty of estimates and projections relating to production, costs and expenses, and health, safety, and environmental risks), commodity price and exchange rate fluctuations and uncertainties resulting from potential delays or changes in plans with respect to exploration or development projects or capital expenditures. Additional information on these and other factors that could affect Veteran's operations or financial results are included in Veteran's reports on file with regulatory authorities. The Company cautions that events or circumstances could cause actual results to differ materially from those projected. Particular risks related to the forward-looking statements addressed above are:

- Actual drilling results achieved in 2005 may differ from the levels of risk assigned by the Company, or the Company's drilling program could change if results are not as estimated, which will affect estimates of production volumes and cash flows.

- Actual prices received by the Company for its commodity sales may differ from the pricing estimates used in projections, based upon forecasts utilized by the Company's independent reservoir engineers Sproule Associates Limited, which will affect estimates of cash flows.

- The average estimated 2005 foreign exchange rate, based upon a forecast utilized by the Company's independent reservoir engineers Sproule Associates Limited, may differ from actual exchange rates for the year, which will affect estimates of cash flows.

- Actual interest rates may differ from estimates used by the Company which will affect estimates of cash flows.

- The cost of materials and services required to complete the 2005 drilling program may differ from cost estimates used by the Company. If this difference is significant, there may be an impact on the number of wells drilled in 2005 by the Company.

- The cost of materials and services required to operate producing wells may differ from cost estimates used by the Company which will affect estimates of cash flows.

Conversion

Boe's are derived by converting natural gas to oil in the ratio of 6 mcf to 1 bbl. Boe's may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf to 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent an equivalency at the wellhead.

The TSX does not accept responsibility for the adequacy or accuracy of this release.

Contact Information

  • Veteran Resources Inc.
    Philip J. Loudon
    President and Chief Executive Officer
    (403) 699-8629
    or
    Veteran Resources Inc.
    J. Peter Henry
    Vice President and Chief Financial Officer
    (403) 699-8632
    Website: http://www.veteranresources.net