Artek Exploration Ltd.
TSX VENTURE : RTK

November 09, 2010 23:41 ET

Artek Announces Third Quarter 2010 Financial Results and Updates Operations

CALGARY, ALBERTA--(Marketwire - Nov. 9, 2010) - Artek Exploration Ltd. ("Artek" or the "Company") (TSX:RTK) is pleased to provide this summary of its financial and operating results for the three and nine month periods ended September 30, 2010. A complete copy of the Company's comparative financial statements for the three and nine month periods ended September 30, 2010, along with management's discussion and analysis in respect thereof will be filed on SEDAR and on the Company's website at www.artekexploration.com.

HIGHLIGHTS



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Three Months Nine Months
Ended September 30, Ended September 30,
2010 2009 Change 2010 2009 Change
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(000s, except per
share amounts) ($) ($) (%) ($) ($) (%)
Financial
Oil and gas revenues 6,190 3,648 70 21,161 13,517 57
Funds flow from
operations (1) 1,558 547 185 6,960 3,568 95
Per share - basic 0.05 0.03 67 0.27 0.20 35
- diluted 0.05 0.03 67 0.27 0.20 35
Net loss (1,394) (1,705) 18 (3,298) (3,978) 17
Per share - basic (0.05) (0.10) 50 (0.12) (0.22) 45
- diluted (0.05) (0.10) 50 (0.12) (0.22) 45
Exploration and
development
expenditures 5,135 692 642 19,936 13,577 47
Net debt 45,511 35,894 27 45,511 35,894 27
Shareholders' equity 84,232 54,984 53 84,232 54,984 53
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(000s) (#) (#) (%) (#) (#) (%)
Share Data
At period-end
Basic 33,083 17,782 86 33,083 17,782 86
Options and warrants 3,461 3,789 (9) 3,461 3,789 (9)
Weighted average
Basic 30,524 17,782 72 27,164 17,782 53
Diluted 30,524 19,300 58 27,164 19,300 41
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(%) (%)
Operating
Production
Natural gas (mcf/d) 6,324 9,498 (33) 7,446 10,280 (28)
Crude oil (bbls/d) 505 93 443 518 100 418
NGLs (bbls/d) 44 27 63 54 33 64
Total (boe/d)(2) 1,602 1,703 (6) 1,813 1,847 (2)
Average wellhead
prices
Natural gas
($/mcf)(3) 4.43 3.36 32 4.83 4.03 20
Crude oil ($/bbl) 72.35 70.30 3 73.57 60.85 21
NGLs ($/bbl) 61.80 52.66 17 62.12 56.82 9
Total ($/boe)(4) 41.99 23.28 80 42.76 26.81 59
Royalties ($/boe) (7.71) (1.42) 443 (6.74) (3.02) 123
Operating cost ($/boe) (12.85) (10.59) 21 (12.78) (11.11) 15
Transportation cost
($/boe) (1.74) (1.53) 14 (1.73) (1.52) 14
Operating netback
($/boe)(5) 19.69 9.74 102 21.50 11.15 93
Drilling activity -
gross (net)
Development (#) 2 (1.6) -- (--) 3 (2.1) 1 (0.5)
Exploration (#) 1 (0.6) -- (--) 3 (2.6) 2 (1.8)
Abandoned (#) -- (--) -- (--) -- (--) -- (--)
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Total (#) 3 (2.2) -- (--) 6 (4.7) 3 (2.3)
Average working
interest (%) 73 -- 78 77
Success rate (%) 100 -- 100 100
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(1) Funds flow from operations is calculated using cash flow from operating activities as presented in the statement of cash flows before changes in non-cash working capital and settlement of asset retirement costs. Funds flow from operations is used to analyze the Company's operating performance and leverage. Funds flow from operations does not have a standardized measure prescribed by Canadian Generally Accepted Accounting Principles and therefore may not be comparable with the calculations of similar measures for other companies.
(2) For a description of the boe conversion ratio, refer to the Advisories contained herein.
(3) Product prices include realized gains/losses from physical fixed price contracts.
(4) Oil equivalent price includes minor sulphur sales revenue.
(5) Operating netback equals revenue less royalties, transportation and operating costs calculated on a per boe basis. Operating netback does not have a standardized measure prescribed by Canadian Generally Accepted Accounting Principles and therefore may not be comparable with the calculations of similar measures for other companies.

Third Quarter Highlights



-- Crude oil and NGLs production increased 358% to 549 boe/d compared to
the third quarter of 2009.
-- Average production for the 2010 three-month period was 1,602 boe/d (34%
crude oil and NGLs compared to 7% for the third quarter of 2009).
-- Operating netbacks totaled $19.69/boe, a 102% increase from the third
quarter of 2009.
-- Funds generated by operations grew to $1.6 million, representing a 185%
increase from the same quarter a year ago.
-- Capital expenditures totaled $5.1 million, which included the drilling
of 3 gross (2.2 net) wells (100% success rate), including the Company's
first Deep Basin Cretaceous horizontal liquids-rich gas well (0.6 net)
on the Alberta/British Columbia border. Subsequent to quarter-end, the
well was tested at over 5.3 mmcf/d and was brought on-stream at a
pipeline restricted rate of 2.2 mmcf/d.
-- Successfully completed its first deep horizontal Montney gas well (0.5
net) with a multi-stage fracture stimulation that had the well flowing
at a restricted test rate of 8.0 mmcf/d and a flowing pressure of 1,600
PSI. The well was brought on production subsequent to quarter-end at an
initial rate in excess of 5.0 mmcf/d.
-- Raised gross funds of approximately $8.7 million to expand the Company's
capital program in the second half of 2010.
-- The Company's credit facility was reaffirmed at the existing $53 million
borrowing base.
-- Commenced trading on the Toronto Stock Exchange on September 9, 2010.


Operations Review

During the third quarter of 2010, Artek invested $5.1 million of capital primarily for the drilling of 3 gross (2.2 net) wells, of which 2 gross (1.6 net) were oil wells and 1 gross (0.6 net) a liquids-rich gas well, as well as the completion of a deep horizontal gas well. Third quarter average production of 1,602 boe/d was negatively impacted by weather related delays in completing and bringing wells on production, by unscheduled turnarounds and the restriction of some natural gas production due to pricing. The Company estimates approximately 200 boe/d of production was lost in the quarter, of which approximately half was related to weather. Weather delays continued to affect operations timing into the fourth quarter.

Artek drilled and successfully completed an upper Cretaceous formation horizontal well (60% W.I.) in the Deep Basin area along the Alberta/British Columbia border. The well was drilled to a total measured depth of just over 2,000 metres and completed in October with a nine-stage propane fracture stimulation program. The well exceeded expectations and flowed on test at 5.3 mmcf/d at a wellhead pressure of 530 PSI (3.7 mPa), of which approximately 10% of the gas rate was estimated to be load fluid. The well costs totaled approximately $2.5 million to drill and complete, and generated approximately $0.4 million of Alberta drilling credits. As a result of the 5% royalty rate, low operating costs and the high heat content (liquids-rich) nature of the gas, Artek anticipates generating operating netbacks of approximately $25.00/boe, assuming a $4.00/GJ gas price and that the liquids are sold in the natural gas stream. The formation has the potential to yield up to 50 to 70 bbls of NGLs per mmcf of gas based on gas analysis and the Company is investigating means to recover more of the liquids, and correspondingly, increase its operating netbacks. The well is currently producing at a rate of approximately 2.3 mmcf/d and we expect to increase those volumes by year-end. Based on results to date, management estimates the project is capable of generating full cycle finding and development costs of less than $8.00/boe, a recycle ratio of over 3 times and a 100% return on investment, assuming a natural gas price of $4.00/GJ. Artek has identified an additional three to four upper Cretaceous horizontal locations in the immediate area and another five to seven horizontal locations on its lands in British Columbia.

Artek also successfully drilled and brought on production a vertical Glauconite oil well on its 100% lands at Leduc Woodbend in central Alberta. The well is currently producing approximately 95 boe/d (95% light crude oil). Production from the property has increased over 30% to approximately 570 boe/d net to the Company since it was acquired by Artek late last year. At only 1,400 metres in depth, all in drill, complete and equipment costs are approximately $800,000 to $850,000 per well. With netbacks over $44.00/boe (assuming $82.00/bbl WTI), and conservative reserves targets, management estimates the wells are capable of generating a 300% return on investment. Up to three wells are planned for this area in the 2011 budget year.

During the third quarter, Artek also drilled a dual-leg horizontal well targeting Montney oil (60% W.I.) at a depth of 1,100 metres on its Beaton, Alberta property and brought it on production at approximately 85 boe/d. The well was drilled to a total measured depth of over 3,000 metres, thereby qualifying for 5% royalties for up to 30 months under the Alberta government's enhanced royalty initiatives announced earlier this year. The Company estimates that it can double the production rates with stimulation and Artek's internal mapping supports up to 20 gross (12.0 net)additional horizontal locations on this "bread and butter" development project.

In the Sinclair area of northwestern Alberta, the tie-in of Artek's third party operated Montney gas well (50% W.I.) that tested at a restricted rate of approximately 8.0 mmcf/d and a flowing pressure of 1,600 PSI was delayed by weather. The well came on production November 1, 2010 and after three days was flowing to the plant at approximately 5.7 mmcf/d (160 e(3)m(3)/d) at a flowing pressure of 2,300 PSI (15,500 kPa), ranking it among the best Montney wells in the area. Long-term, the Company estimates that there is the potential for more than 24 gross (16.0 net) horizontal development locations in the Upper and Lower Montney on our 7.5 gross (6.8 net) sections at Sinclair and we are working with a third party mid-streamer to optimize production capability from the area.

On October 28, 2010, the Company spud its first horizontal Doig well (60% W.I.) in the Inga/Fireweed area of northeastern British Columbia. The well is programmed for a total measured depth of approximately 3,000 metres. Based on vertical and horizontal well analogues, we believe the play is prospective for rates of between 400 and 700 boe/d, of which approximately 35% to 40% is potentially oil and NGLs. With the potential for up to 100 bbls of liquids per mmcf of gas, management believes the project is capable of generating netbacks of between $25.00 to $30.00/boe assuming a price of $4.00/GJ for natural gas and an $80.00/bbl oil price, and as such, would be a very material project for Artek. If successful, we believe that Company lands are prospective for an additional 16 to 25 horizontal locations. Volumes will be processed at the Company's operated facility in the area (60% W.I.), which has capacity for 10.0 mmcf/d and can be expanded as required.

As previously announced, Artek closed a private placement financing in the third quarter, issuing approximately 7.6 million common shares for total gross proceeds of approximately $8.7 million. Over 65% of the financing (approximately $5.8 million) was taken up by insiders of the Company. Funds have been used to expand our Company's 2010 second half capital program for oil and liquids-rich natural gas projects.

On September 9, 2010, Artek's listing for its common shares graduated from the TSX Venture Exchange to the Toronto Stock Exchange. The move to the TSX is another milestone for Artek as its securities are now listed on Canada's major investment market.

Outlook

For the fourth quarter of 2010, Artek has natural gas hedges in place for 2,500 GJ/d at an average floor price of $4.95/GJ, giving our Company some protection against current low natural gas prices. In addition, we have hedged 3,000 GJ/d at a price of $5.09/GJ for the 2011 calendar year. As part of the same swap transaction, Artek sold WTI calls on 300 bbls/d at US$90.00 for the 2011 calendar year and US$95.00 for the 2012 calendar year. The 2011 gas hedge represents approximately 30% to 35% of the Company's anticipated 2010 exit natural gas production.

Based on a recent review of the borrowing base and facility amount associated with our Company's revolving operating demand loan (the "Credit Facility"), the lender has reaffirmed the existing $53 million borrowing base associated with the Credit Facility. The next scheduled Credit Facility review is scheduled for January 1, 2011. The Company presently has approximately $41 million drawn under the Credit Facility.

In light of continued low natural gas prices, Artek believes it is prudent to limit its fourth quarter capital expenditures to tie-ins of third quarter wells, a completion in the Noel area of British Columbia and the horizontal Doig well at Inga. This results in a reduction of planned capital spending of approximately $2 million to $2.5 million with second half capital expenditures now estimated to be approximately $10 million to $11 million and total 2010 investment being approximately $25 million to $26 million. The Company put greater capital effort into the existing operations completed or underway and has exceeded expectations in production deliverables for those wells. Consequently, despite the capital decrease, Artek anticipates exiting 2010 with production volumes of 2,200 to 2,400 boe/d with current production being approximately 2,100 boe/d. As a result of third party and weather delays and the second half capital deferral measures, production for 2010 is expected to average 1,800 to 1,900 boe/d.

Capital spending during the first quarter of 2011 is anticipated to be approximately $5 million. The Company plans to drill 2 gross (1.1 net)horizontal wells, with one well in the Sinclair area and the second in the Inga area.

Artek is pleased with the results achieved so far in the second half of 2010. The Company is successfully executing its plan to direct capital towards liquids-rich gas and oil opportunities from a balance of horizons and geographical areas where it has control. Artek looks forward to reporting on the sustained execution of this strategy in 2011, while continuing to manage our Company's exposure to deep resource gas plays in anticipation of the eventual return of a robust natural gas markets.

Artek is a crude oil and natural gas exploration, development and production company headquartered in Calgary, Alberta, Canada. Artek's shares trade on the Toronto Stock Exchange under the symbol "RTK".

ADVISORIES

Forward Looking Statements: This document contains forward-looking statements. Management's assessment of future plans and operations, production estimates including anticipated year end annual production and exit rates, initial production rates, drilling inventory and plans, timing of drilling and tie-in of wells, the potential number of drilling locations, productive capacity and prospectivity of new wells, capital expenditures and the nature and timing of these expenditures, anticipated finding and development and operating costs, recycle ratios, operating netbacks and anticipated returns on investment, may constitute forward-looking statements under applicable securities laws and necessarily involve risks including, without limitation, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, incorrect assessment of the value of acquisitions, failure to realize the anticipated benefits of acquisitions, the inability to fully realize the benefits of the acquisitions, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources. As a consequence, the Company's actual results may differ materially from those expressed in, or implied by, the forward looking statements. Forward looking statements or information are based on a number of factors and assumptions which have been used to develop such statements and information but which may prove to be incorrect. Although Artek believes that the expectations reflected in such forward-looking statements or information are reasonable, undue reliance should not be placed on forward looking statements because the Company can give no assurance that such expectations will prove to be correct.

In addition to other factors and assumptions which may be identified in this document and other documents filed by the Company, assumptions have been made regarding, among other things: the impact of increasing competition; the general stability of the economic and political environment in which Artek operates; the ability of the Company to obtain qualified staff, equipment and services in a timely and cost efficient manner; drilling results; the ability of the operator of the projects which the Company has an interest in to operate the field in a safe, efficient and effective manner; Artek's ability to obtain financing on acceptable terms; field production rates and decline rates; the ability to replace and expand oil and natural gas reserves through acquisition, development or exploration; the timing and costs of pipeline, storage and facility construction and expansion; the ability of the Company to secure adequate product transportation; future oil and natural gas prices; currency, exchange and interest rates; the regulatory framework regarding royalties, taxes and environmental matters in the jurisdictions in which the Company operates; and Artek's ability to successfully market its oil and natural gas products. Readers are cautioned that the foregoing list of factors is not exhaustive. Additional information on these and other factors that could affect the Company'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 the Company's website (www.artekexploration.com). Furthermore, the forward looking statements contained in this document are made as at the date of this document and the Company does not undertake any obligation to update publicly or to revise any of the included forward looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

BOE Conversions: 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 one tonne of sulphur to one barrel and six thousand cubic feet of natural gas to one barrel. This conversion ratio of six thousand cubic feet of natural gas to one barrel is based on an energy equivalent conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Non-GAAP terms: This press release contains the terms "funds flow from operations" and "netbacks" which are not terms recognized under Generally Accepted Accounting Policies ("GAAP"). The Company uses these measures to help evaluate its performance as well as to evaluate acquisitions. The Company considers funds flow from operations a key measure as it demonstrates the Company's ability to generate funds necessary to repay debt and to fund future growth through capital investment. Funds generated from operations should not be considered as an alternative to, or more meaningful than, cash flow from operating activities as determined in accordance with Canadian GAAP as an indicator of Artek's performance. Artek's determination of funds flow from operations may not be comparable to that reported by other companies. The reconciliation between net income and funds flow from operations can be found in the statement of cash flows in the financial statements. Artek also presents funds generated from operations per share whereby per share amounts are calculated using weighted average shares (basic and diluted) outstanding consistent with the calculation of net earnings per share, which per share amounts are calculated under GAAP. The Company considers netbacks as a key measure as it demonstrates its profitability relative to current commodity prices. Operating netbacks are calculated by taking total revenues and subtracting royalties, operating expenses and transportation costs on a per boe basis.

Contact Information

  • Artek Exploration Ltd.
    Darryl Metcalfe
    President and Chief Executive Officer
    (403) 296-4799
    or
    Artek Exploration Ltd.
    Darcy Anderson
    Vice President Finance and Chief Financial Officer
    (403) 296-4775
    www.artekexploration.com