Choice Resources Corp.

Choice Resources Corp.

July 27, 2005 20:15 ET

Choice Announces First Quarter Financials and Drilling Update

CALGARY, ALBERTA--(CCNMatthews - July 27, 2005) - Choice Resources Corp. (TSX VENTURE:CZE): Quarter ended May 31st, 2005

President's message:

For the three month period;

- Earnings are $0.8 million or 2 cents per share

- Cash flow from operations is up over 28% to 2.5 million and on target at 5 cents per share

- Production averaged 1,349 boe/d after the sale of a non-core property

- Operating expenses are reduced 9% to $1.4 million for the quarter

- G&A is essentially flat for the quarter

- Net debt is reduced by 36% to $10.1 million

- Interest expense has been reduced 40%

- 5 wells were drilled in the quarter and all were cased (2.9 net)

- 4 of these wells were exploration wells

Progress on exploration was the general focus in the first quarter and all wells were cased for testing. The weather caused a delay in the testing and completion of these wells until the second quarter. Land was also acquired in our core exploration area and additional seismic over our key operating areas was acquired. Several prospects will be drilled in the Viking area in the second quarter.

The Corporation is planning to drill a horizontal well at Pincher Creek and is in final discussions with potential partners to assist in the exploitation of this high impact play. The well is expected to spud in early August.

Production was down slightly during the quarter at 1,349 boe/d after the sale of a 60 b/d property in December last year. The Pincher Creek field was down for one week in April for a plant turn-around. Second quarter production will be down until a pipeline can be repaired at Pincher Creek (estimated at 3 weeks). This will be offset by production from recently drilled wells as these are brought on stream in August and are expected to add 200 boe/d by mid-August.

Cash flow at 5 cents per share is essentially on target with internal projections. Total cash flow of $2.5 million is up due mainly to price increases.

Our exploration play inventory continues to grow as land was added in our core exploration area. The Participation Agreements with Vecta Energy Corp. covering 3 separately identified prospects are at a point where the decision to commit to wells in these areas will be made very shortly after discussion with our partner. (The program uses proprietary acquisition, processing and interpretation).

At Snipe Lake area, subsequent to the quarter, road construction has commenced into one well to provide year round access for production and to provide access for further drilling opportunities. This well is currently shut-in due to limited access.

Net debt continues to be reduced and is reduced 36% from the prior comparable period.

Results to date are excellent and while weather kept production from increasing, several new plays were tested and have set up several exploitation opportunities. Enclosed are the financial statements. Please refer to the associated notes filed on Sedar (in particular the notes to the annual audited statements), the operations summary and the management discussion and analysis.

Gordon D. Harris
President and CEO

Quarter ended May 31, 2005

($000 except per unit and where noted)
(Per share #'s are based on the weighted average # of shares issued and
outstanding during the period)

Q1 Q1
2005 2004

Gross Sales Revenue 5,469 5,356
Net Sales Revenue 4,354 4,306

Cash Flow 2,503 1,949
Per Share (basic) 0.05 0.06

Net Income 796 907
Per Share (basic) 0.02 0.03

General & Administrative Expense 349 353

Capital Expenditures 2,815 1,584

Net Debt (excluding capital lease) 10,052 15,683

Shares Outstanding (millions)
Weighted Average (basic) 50.12 29.78
At Quarter end (basic) 50.68 29.83


Natural gas (mcf/d) 7,771 8,204
NGL (bbls/d) 53 72
BOE/d 1,349 1,440

Gas $/mcf 7.18 6.68
Liquids $/bbl 68.19 47.32
$/BOE 44.08 40.44

Management Discussion and Analysis

Management's discussion and analysis (MD&A) should be read in conjunction with the unaudited May 31, 2005 financial statements and accompanying notes as well as the MD&A for the year ended February 28, 2005 and the audited financial statements for that year. Where amounts are expressed on a barrel of oil equivalent basis (boe), gas volumes have converted to oil equivalents at a six to one ratio.

This commentary is based on information available at July 22, 2005. Additional information relating to Choice Resources Corp. is available on SEDAR at

The MD&A uses the terms "cash flow from operations" which is before non-cash working capital adjustments and "cash flow per share," also before non-cash working capital adjustments. Although these are not currently recognized measures under Canadian generally accepted accounting principles (GAAP), management believes that in addition to net earnings, cash flow is a useful additional measure or indication as to how the Company is performing. It provides an indication of what funds the Company is generating from its operations to deploy, along with other sources of capital, in financing its on going exploration and development efforts.

Overall performance

Choice is a publicly listed company on the TSX Venture Exchange trading under the symbol CZE. It is engaged in the business of exploration, development and production of oil and gas reserves in the Province of Alberta.

Choice Resources Corp. ("Choice" or the "Company") continues to report strong financial results and another successful quarter ending May 31, 2005. Commodity prices remained strong for the late winter and early spring period and production for the three months averaged 1,349 boe/d compared to 1,440 boe/d for the comparable period last year. Management continues to pursue several new prospects and is continuing to exploit opportunities in its core properties, the most exciting of which is the development horizontal well in the Pincher Creek area.

In the first three months of the current year Choice completed a key equity placement in May 2005 raising gross proceeds of $7.5 million. This has allowed the Company to expand the capital budget to over $16 million and to move forward in the major development project in Pincher Creek. Net debt now stands at less than one times cash flow from operations so the Company is well positioned financially to undertake planned exploration and exploitation programs.

Annual Information February 28, February 29, February 28,
2005 2004 2003

Total Revenue $ 19,981,132 $ 16,617,958 $ 2,068,406

Net Income (loss) $ 3,853,576 $ (1,722,559) $ 188,484

Per Share - Basic $ 0.07 $ (0.10) $ 0.03
- Diluted $ 0.07 $ (0.10) $ 0.03

Total Assets $ 55,015,661 $ 48,281,896 $ 5,651,705
Current liabilities,
including bank debt $ 21,130,932 $ 30,626,711 $ 2,604,366
Total Long-Term Financial
Liabilities $ 10,583,207 $ 8,480,622 $ 918,000

Review of Major properties


100% Working Interest

41 section Choice Operated Unit

Extremely Long Life Reserves

3D&2D seismic data

Numerous High Impact Drill Locations

The Pincher Creek production remained constant throughout the quarter. The Shell Waterton gas plant that processes the Choice gas was shut down for one week in April, which resulted in a drop in April sales volumes.

This down time allowed Choice to carry out build-up and pressure surveying. The results have led to several new development opportunities. Design work for enhancing the Unit production was initiated in the quarter based on the pressure surveys.

The previously discussed horizontal development well is expected to be drilled in Q2/Q3.


100% Working Interest in Lands and Facilities

Choice Operated

Multi Zone Potentials

The results of the seismic and reservoir analysis highlighted two development targets. These featured were successfully drilled, cased and tested in Q1. The gas well was completed, tied in and on production by quarter's end while the oil well was completed and was awaiting surface facilities to bring it on-stream.


Multi zone Potentials

Extensive high working interest lands and facilities

Choice Operated

Choice increased activities in this area over the quarter. Two wells were drilled, cased and completed in the quarter. Tie-ins are expected early next quarter.

The results of last quarter's geologic and seismic evaluations of three of the Viking sub-areas have produced a multi well drilling program. Development and exploration licenses were obtained and drilling is expected to commence early next quarter.

A down spacing application before the AEUB is delaying the initiation of an additional multi-well drilling operation. Approval is expected Q3 which will lead to a Q4 drilling program.

Two Horseshoe canyon CBM wells were completed and placed on production as part of a test program to initiate up to a 24 well program. Early results are consistent with surrounding producers.


Multi zone Potentials

Large tracts of Undeveloped lands

Mostly Choice Operated

High Impact Well Potentials

After a successful test, Choice put on-stream a 49% interest well, which came on at 400 mcf/d with 10 bbl/d condensate. Based on long term rates, offsetting opportunities will be investigated.

Two additional wells were brought on-stream at rates of 500 and 2000 mcf/d. Working interests in these wells are 49 and 35% respectively. A third oil well, with a 49% working interest, was placed on production at 40 bbl/d and was shut in at the end of the period pending road construction.

Production for these wells during the quarter was intermittent due to weather and normal start-up problems.

A Kaybob well was drilled in Q1. The well is being completed in Q2. Two additional wells are planned for this year at a working interest of 42%.

At Chambers and Gilby, the Company and its partner are continuing to analyze the shear wave seismic shot in the winter and a decision on well commitments will be made shortly.

2004 Operation Summary

Choice is principally a natural gas producer. However, in the first quarter of this year the Company brought a modest amount of oil on-stream. However, almost 100% of the production revenues continue to be derived from natural gas and natural gas liquids (including sulphur as a by-product in the Pincher Creek area). In the first quarter ended May 31, 2005 the Company recorded sales volumes of 714,887 mmcf are down from 754,821 mmcf recorded in the same period last year.

Natural gas volumes produced and sold averaged 7,771 mcf per day compared to 8,204 mcf per day last year. (Sulphur volumes were included in gas volumes on a 6:1 equivalency basis. Sulphur is a very small percentage of this number.) The reduction is due, in part, from flush production at the end of last year's drilling program, combined with some down time experienced at the Shell Waterton Gas Plant.

The total natural gas liquids (NGLs) production was 4,918 barrels in the first quarter, compared to 6,648 in the prior year. The decrease in NGL production reflects a revision in liquids allocated at the processing plant in the Pincher Creek / Waterton area and significant downtime at Shell's Waterton plant during the quarter.

On a BOE basis, average daily production rates for the quarter ended May 31, 2005 and May 31, 2004 were 1,349 and 1,440 BOE per day respectively.

Natural gas prices averaged $7.18 per mcf for the quarter compared to $6.68 for the prior year. NGL prices averaged $68.19 per bbl in the current quarter compared to $47.32 for the same period last year. Overall, prices per BOE for the quarter ended were $44.08 compared to $40.44 for the comparable quarter last year. This is an increase in the price per BOE of 9% above last year and reflects the general price increases experienced in the upstream sector of the oil and gas industry this past year.

Summary of Quarterly
Results (8 quarters)

1st Quarter 4th Quarter 3rd Quarter 2nd Quarter
31-May-05 28-Feb-05 30-Nov-04 31-Aug-04

Gross revenue $ 5,468,893 $ 5,527,444 $ 4,309,546 $ 4,959,014

Net income (loss) $ 796,323 $ 1,018,089 $ 621,829 $ 418,070

Net income (loss)
per share - basic
and diluted $ 0.02 $ 0.02 $ 0.01 $ 0.01

1st Quarter 4th Quarter 3rd Quarter 2nd Quarter
31-May-04 29-Feb-04 30-Nov-03 31-Aug-03

Gross revenue $ 5,356,382 $ 6,592,718 $ 4,025,200 $ 4,308,863

Net income (loss) $ 907,083 $ (70,897) $ (991,587) $ (148,968)

Net income (loss)
per share - Basic
and diluted $ 0.03 $ (0.00) $ (0.05) $ (0.01)


Gross revenue from natural gas, oil and related products for the year increased 2% to $5.47mm over the prior year total of $5.36mm. Total revenue was up due to the increase in prices of approximately 9%, offset with a small decrease in sales volumes. Revenue and operating expenses have been restated for the prior year to reclassify natural gas transportation costs as operating costs rather than netting these from revenue, as required by the new accounting guidelines. (Refer to Financial Statement note 3(b), Changes in Accounting Policies.)


Royalties, net of ARTC, for the first quarter increased to $1.11mm from $1.05mm last year, mainly due to price increases. Overall, royalties as a percentage of gross revenue remained constant at 20%, or $8.99 per BOE compared to $7.93 per BOE for the same period last year.

Production and Operating Expenses:

Operating expenses for the first quarter decreased by 9% to $1.40mm compared to $1.54mm in the prior year. (Refer to Financial Statement note 3(b), Changes in Accounting Policies.)

On a BOE basis, operating costs are down 3%. On a dollars per BOE basis, operating costs were $11.25 / BOE versus $11.62 / BOE respectively. Prior to the required transportation adjustment, operating costs on a BOE basis were $10.09 and $10.62.

General and administrative expenses:

General and administrative expenses, net of recovery, were $349,211 compared to $352,754, which is a decrease of 1%. G&A per BOE was $2.81 compared to $2.66 last year. The Company capitalized $181,675 in G&A to property, plant and equipment this year compared to $191,918 last year. Approximately 30% of all G&A costs are directed toward longer term exploration efforts and accordingly, these costs are capitalized as property, plant and equipment assets.

Interest and financing expense:

Interest expenses decreased substantially to $106,063 from $179,387. This reduction of 41% from the first quarter of last year reflects the overall lower levels of debt carried by the Company. On a BOE basis, interest costs in the first quarter of this year were $0.85 per BOE compared to $1.35 per BOE in the prior first quarter of last year.

Depletion, depreciation, and accretion:

The depletion, depreciation and accretion provision increased to $1.15mm from $1.03mm or $9.31 per BOE compared to $7.74 last year. As a percentage of revenue, the current year was consistent with the prior year at 21% and 19% respectively.

Net income and cash flow from operations:

Cash flow from operations for the current quarter (defined as operational cash flow computed by subtracting general and administrative expenses, interest expense and cash income taxes from gross revenues net of royalties and operating and production expenses) increased by 43% to $2.50mm ( $0.05 per share) compared to $1.95mm ($.06 per share) in the first quarter of last year. This increase in cash flow is primarily a reflection of increased commodity prices and a decrease in interest expense.

Net income was at comparable levels to the prior year first quarter at $0.80mm ($0.02 per share) compared to net income of $0.91mm ($0.03 per share) last year.

Per share amounts have been calculated on a basic and fully diluted basis as the warrants are considered non-dilutive.

Capital Expenditures:

During the current period, the Company incurred $2.82mm in capital projects. Major expenditures included the following:

Drill, completion and
evaluation of a successful
oil well, will begin
Bow Island 100/15-06-011-11 W4 $ 590,039 production Q2.

Successful gas well drilled
and cased. Completion and
Chigwell 100/07-11-042-25 W4 414,672 tie-in Q2.

Drilled and cased successful
gas well. Q2 activity
includes completion and
Windfall 102/13-15-060-16 W5 414,876 tie-in.

Drilling success supplemented
with seismic interpretation
to identify further drilling
Seismic Activity 399,085 opportunities.

Successful gas well started
Bow Island 100/07-18-011-11 W4 148,632 producing in Q1.

Liquidity and capital resources:

In the first quarter of this current fiscal year Choice was able to reduce its debt and loans position to levels at or below the target range of one times operating cash flow. The equity placement of $7.5mm, which closed in May, 2005, allowed the Company to reduce its net debt position to $(10.16)mm from $(16.67)mm in the first quarter of the prior year. The Company, since the new management team was appointed in February 2004, has raised over $20,000,000 in new equity and has taken the Company from a highly leveraged position to a financially stable condition.

Management feels that the Company is financially sound and that its planned capital program for the coming fiscal year can be financed almost entirely through cash flows generated from operations without having to incur significant amounts of new debt.

The Company is obligated under a long term capital lease for a compressor at one of its facilities. Choice has an obligation to purchase this compressor when the lease ends in October 2006 for a one time payment of $391,509. The Company had no off balance sheet financial arrangements or interests in any partnership or any minority interests not recorded in the financial statements as presented.

The Company has a credit facility for up to $20,000,000 with a major Canadian chartered bank. At the quarter end the Company had drawn $9,125,000 against this credit.


In the first quarter ended May 31, 2005, the Company entered into a fixed price swap for 1,000 GJ/d at a price of $7.11 / GJ for the period April 1, 2005 to October 31, 2005. The Company's policy is to hedge no more than 25% of production at any given time and to reduce risk due to price volatility.

Related party transactions:

(a) Other than as disclosed elsewhere, the Company paid or accrued the following during the quarter ended May 31, 2005

(i) consulting fees of $151,713 (2004 - $95,677) to companies controlled by senior officers of the Company.

These transactions are in the normal course of operations and are measured at the exchange amount which is the amount of consideration established and agreed to by the related parties.


Choice continues to focus on growing production and increasing the reserve base primarily through the drill bit. Additionally, the Company has been focused on exploration activities in Viking, Snipe Lake and Wallace. The Company drilled and cased 5 gross and 2.95 net wells in Q1. Weather prevented the completion of several of these wells, which is being done in Q2.

One of the Company's major objectives is to drill and evaluate the development well in the Pincher Creek area as well as to further assess the future development plans for this high impact area. In Q2/Q3, the Company expects to spud the horizontal development well in Pincher Creek.

Critical accounting estimates:

The preparation of financial statements that conform with Canadian generally accepted accounting principles requires management to make the following estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses for the period then ended.

Full Cost Accounting - The Company follows the full cost method of accounting. All costs for exploration and development of reserves are capitalized in a country by country cost centre; the costs are then depleted on the unit of production method based on estimated proved reserves. The capitalized costs can not exceed a ceiling amount. If the capitalized costs are determined to be in excess of this reserve based ceiling amount, the excess is written off. An alternative method of accounting for oil and natural gas operations is the successful efforts method. Under this method the cost centre is defined to be a property rather than a country cost centre and exploratory dry holes and geological and geophysical costs are charged to earnings when incurred.

Reserves - The Company engages independent qualified reserve evaluators to evaluate its reserves each year. Reserve determinations involve forecasts based on property performance, future prices, future production and the timing of expenditures; all these are subject to uncertainty. Reserve estimates have a significant impact on reported financial results as they are the basis for the calculation of depreciation and depletion. Revisions can change reported depletion and depreciation and earnings; downward revisions could result in a ceiling test write down.

Asset Retirement Obligation - The company provides for the estimated abandonment costs using a fair value method based on cost estimates determined under current legislative requirements and industry practice. The amount of the liability is affected by the estimated cost per well, the timing of the expenditures and the discount factor used. These estimates will change and the revisions will impact future depletion and depreciation rates.

Stock Based Compensation - The stock option plan provides for granting of stock options to directors, officers, employees and consultants. Beginning in 2003, the Company is recording a charge against earnings for all options granted after March 1, 2003. The basis for this expense is the Black-Sholes valuation model. None of the Company's awards call for settlement in cash or other assets.

Forward looking Statements:

Certain information regarding the Company as set forth in the MD&A, including management's assessment of the Company's future plans and operations, contain forward looking statements that involve substantial known and unknown risks and uncertainties. These forward looking statements are subject to numerous risks and uncertainties, certain of which are beyond the control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuation, imprecision of reserve estimates , environmental risks, taxation policies, competition from other producers, the lack of qualified personnel or management, stock market volatility and the ability to access sufficient capital from external or internal sources. The actual results, performance or achievement could materially differ from those expressed in, or implied by, these forward looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward looking statements will transpire or occur, or if any of them does, what benefits the Company will derive there from.

Choice Resources Corp.
Consolidated Balance Sheets
As At May 31, 2005 and February 28, 2005

May 31, February 28,
2005 2005
unaudited audited


Current assets
Accounts receivable and prepaid expenses 4,561,140 4,464,828

Property, plant and equipment (note 3) 47,227,967 45,519,928

Goodwill 5,030,905 5,030,905
------------- -------------

$ 56,820,012 $ 55,015,661
------------- -------------
------------- -------------


Current liabilities
Cheques in transit $ 603,058 $ 1,095,511
Accounts payable and accrued liabilities 4,885,062 7,458,904
Obligation under capital lease 103,553 101,517
Bank loan 9,125,000 12,475,000
------------- -------------

14,716,673 21,130,932

Obligation under capital lease (note 4) 437,141 463,805

Asset retirement obligations (note 5) 2,273,222 2,225,402

Future income taxes 9,815,644 7,894,000
------------- -------------

27,242,680 31,714,139
------------- -------------

Shareholders' Equity

Capital stock (note 6) 34,757,752 29,401,947

Contributed surplus (note 8) 1,202,024 1,078,342

Deficit (6,382,444) (7,178,767)
------------- -------------

29,577,332 23,301,522
------------- -------------

$ 56,820,012 $ 55,015,661
------------- -------------
------------- -------------

The accompanying notes are an integral
part of these financial statements.

Approved by the Board,

Signed: "Gordon D. Harris", Director Signed : "Chris Cooper" , Director
------------------- ----------------

Choice Resources Corp.
Consolidated Statements of Earnings and Deficit
Three months Ended May 31, 2005 and 2004

May 31, May 31,
2005 2004
unaudited unaudited
- note 2)

Oil and natural gas sales $ 5,468,893 $ 5,356,382
Royalties (1,114,736) (1,049,904)
------------- -------------

4,354,157 4,306,478
------------- -------------

Production 1,395,310 1,539,161
General and administrative 349,211 352,754
Interest on obligation under capital lease,
bank loan and loan payable 106,063 179,387
Stock-based compensation (note 7) 123,680 108,844
Depletion, depreciation and accretion 1,154,780 1,025,166
------------- -------------
------------- -------------

3,129,045 3,205,312
------------- -------------

Earnings before income taxes 1,225,112 1,101,166
------------- -------------

Income Taxes
Future 428,789 194,083
------------- -------------

428,789 194,083
------------- -------------

Net earnings 796,323 907,083

Deficit, beginning of period (7,178,767) (10,143,839)
------------- -------------

Deficit, end of period $ (6,382,444) $ (9,236,756)
------------- -------------
------------- -------------

Net earnings per share
Basic $ 0.02 $ 0.03
------------- -------------
------------- -------------
Diluted $ 0.02 $ 0.03
------------- -------------
------------- -------------

Weighted average common shares 50,122,921 29,780,471
Diluted weighted average common shares 50,683,881 29,831,338

The accompanying notes are an integral part
of these financial statements.

Choice Resources Corp.
Consolidated Statements of Cash Flows
Three months Ended May 31, 2005 and 2004

May 31, May 31,
2005 2004
unaudited unaudited
- note 2)

Cash provided by (used for):

Operating activities
Net earnings $ 796,323 $ 907,083
Items not affecting cash
Depletion, depreciation and accretion 1,154,780 1,025,166
Stock-based compensation expense 123,680 153,166
Future income taxes 428,789 (136,325)
------------- -------------

2,503,572 1,949,090

Changes in non-cash working capital (note 9) (1,587,608) (1,447,548)
------------- -------------

915,964 501,542
------------- -------------

Financing activities
Repayment of obligation under capital lease (24,628) (22,749)
Increase (repayment) of bank loan (3,350,000) 675,000
Repayment of loan payable - (10,000,000)
Proceeds on issuance of common shares,
net of issuance costs 6,848,660 10,884,093
Proceeds on issuance of flow through shares,
net of issuance costs - -
------------- -------------

3,474,032 1,536,344
------------- -------------

Investing activities
Property, plant and equipment expenditures (2,814,999) (1,583,998)
Change in non-cash working capital (note 9) (1,082,544) -
------------- -------------

(3,897,543) (1,583,998)

Increase in cash 492,543 453,888

Cash and cash equivalents, beginning of
period (1,095,511) 848,860
------------- -------------

Cash and cash equivalents, end of period $ (603,058) $ 1,302,748
------------- -------------
------------- -------------

The accompanying notes are an integral
part of these financial statements.

The TSX Venture Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of the contents of this news release.

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