Churchill Energy Inc.

Churchill Energy Inc.

April 13, 2009 09:00 ET

Churchill Announces 2008 Year End Results

CALGARY, ALBERTA--(Marketwire - April 13, 2009) - Churchill Energy Inc. (TSX VENTURE:CEI)("Churchill") today filed its audited annual financial statements for the year ended December 31, 2008 and related Management's Discussion and Analysis on SEDAR ( and on the Company's website at

Message to Shareholders

The Company started the year with net debt of $12.5 million and exited 2008 with net debt of $1.9 million. With the addition of a new light oil waterflood property at Brazeau through the Welton transaction and the progress the Company made in 2008 on the Grand Forks waterflood project we have increased our exposure to oil by almost doubling our proved plus probable oil reserves from December 31, 2007. Both of these events are of significance as we have strengthened our balance sheet and added a second core oil property to our asset base. The Company is fortunate to have two waterflood projects that require minimal capital expenditures but have the potential to deliver production growth in the near term. Churchill will continue to add value to shareholders by focusing on the optimization of our waterflood projects as well as look to increase our asset base by way of merger or acquisitions. In today's current difficult economic environment Churchill has positioned itself to meet the challenge.

Churchill is currently trading at a significant discount to its net asset value of $0.68 per share based on GLJ's December 31, 2008 price forecast and a 10 percent discount rate. When we add in Welton our net asset value increases to $0.83 per share.

Churchill announced a plan of arrangement with Welton Energy Corporation ("Welton") in December 2008 and closed the transaction in February 2009. The Company acquired Welton at a time when commodity prices were dropping which resulted in acquisition metrics of $25,400 per flowing boe, $9.21 per proven boe and $3.99 per proved plus probable boe based on GLJ's March 1, 2009 reserve report for Welton. The key asset in the transaction is a light oil waterflood property at Brazeau.

Operating netbacks were $39.11 per boe, an increase of $12.60 per boe over 2007 as a result of strong commodity prices in the first three quarters of 2008. Production averaged 362 boe/d in 2008 which is 20 percent lower than the 457 boe/d in 2007. This is primarily a result of the sale of 165 boe/d at Smoky.

In Grand Forks, the drilling results from the three wells drilled in the third quarter of 2008 resulted in an increased estimate in the reservoir from 4.5 MMbbls of original oil in place to 5.5 MMbbls of original oil in place with an estimated 15 percent to 19 percent recovery factor. Current production from the waterflood is approximately 68 bbls/d and as the pool continues to pressure up, oil rates are projected to increase later in 2009. Churchill will also look to follow up on the success of the new oil well that was drilled in the third quarter as results were better than expected and there is a possibility that the pool could be extended. In addition the Company began a facility expansion in Q4 2008 to handle increased fluid volumes from the waterflood project. The expansion was completed in March 2009 and increased fluid handling capacity by 7,000 barrels per day to 17,000 barrels per day.

At Chime, the re-entry at 12-7-59-5W6M well in the first quarter of 2008 did not reach the primary target and two uphole zones were completed and put on production, however the results were disappointing. Churchill farmed out its interest in the well early in 2009 and the well was re-entered again and successfully deepened. Early results are encouraging. Churchill retained a 25 percent working interest in the well and incurred no costs in the latest operation.

Industry Conditions

The world financial crisis, volatile financial markets and the economic slow down as a result of the global recession has reduced the demand for oil and natural gas. This has resulted in a sharp decline in commodity prices in the fourth quarter of 2008 and into 2009. The demand for oil has temporarily reduced and we expect that oil prices will be much lower in 2009 as compared to 2008. In the first few months of 2009 we have seen natural gas prices continue to soften even though North America experienced a fairly cold winter. Storage volumes have risen as a result of increasing gas supply in the United States and reduced industrial demand due to the weakened economy. This will result in lower average natural gas prices in 2009 compared to 2008.

There has been a rapid drop in the active rig count in Canada and the United States which should bode well for a recovery in natural gas prices when the economy strengthens. In addition there will be continued pressure on service companies to reduce service and supply costs in the current environment.

Business Outlook

The Alberta Government announced a new incentive program on March 3, 2009 to encourage additional activity in the province. The new incentives include a royalty credit of $200 per meter drilled on new conventional oil and natural gas wells and a royalty reduction that provides for a maximum royalty rate of five percent on new wells that are placed on production between April 1, 2009 and March 31, 2010 for up to one year of production or the first 50,000 boe's produced from a new well.

Churchill's Board of Directors has approved a capital budget of $1.2 million which includes drilling five (1.8 net) wells in Grand Forks and Alexander. The Company expects 2009 average production to be 429 boe/d, an increase of 18 percent from 362 boe/d in 2008 and expects to exit 2009 with production of approximately 475 boe/d.

The decisions made by Churchill in 2008 have resulted in a stronger and healthier company which is positioned to weather the current storm and show growth for the coming years with its current asset base. The Company will focus on optimizing its two waterflood projects and continue to evaluate opportunities to grow by way of merger or acquisition.


- Cash flow from operations totaled $3.3 million in 2008, an increase of 32 percent over 2007 levels.

- Sold an operated natural gas property in Smoky Alberta for net proceeds of $14.1 million consisting of approximately 165 BOE/d of production or $85,000 per flowing BOE and 1,311 MBOE's of total proved plus probable reserves based on GLJ 's December 31, 2007 reserve report or $10.76 per BOE.

- Proceeds on the disposition were used to eliminate bank debt. At December 31, 2008 Churchill has a working capital deficiency of $1.9 million and $6.5 million of unused bank lines.

- On December 16, 2008, Churchill announced that it would be acquiring Welton Energy Corporation for consideration of $3.2 million in net debt assumed and issuance of approximately 5.5 million common shares to Welton debentureholders and shareholders. The deal closed in February 2009 and Welton is now a wholly owned subsidiary of Churchill. Churchill acquired 150 BOE/d of production at $25,400 per flowing BOE and 953 MBOE's of total proved plus probable reserves based on GLJ's March 1, 2009 reserve report at $3.99 per BOE. In conjunction with the Welton acquisition, Churchill's operating demand loan was increased to $9.0 million from $6.5 million and the non-revolving acquisition / development demand loan was increased to $2.5 million from $0.7 million.

- Churchill's net asset value at December 31, 2008 based on GLJ's January 1, 2009 price forecast and discounted 10 percent is $0.68 per share. On a combined basis using GLJ's March 1, 2009 price forecast and discounted 10 percent for Welton's proved plus probable reserve value results in a combined net asset value of $0.83 per share.


- Production averaged 362 BOE/day in 2008 compared to 457 BOE/day in 2007 as a result of the Smoky property disposition.

- Drilled three successful wells in Grand Forks, one as a Glauconite producer and two water injection wells as part of the waterflood project.

- Expanded our battery capacity at Grand Forks to 17,000 barrels of fluid per day from 10,000 barrels of fluid per day to handle future increases in production from the area.

- Operating netbacks increased 48 percent to $39.11 per BOE from $26.51 per BOE in 2007 primarily as a result of higher commodity prices in the first three quarters of 2008.

Summary of results
are as follows:
Three Months Ended Year Ended
December 31, December 31,
$ 2008 2007 2008 2007 Change

Oil and gas
revenues, before
royalties 1,167,425 1,968,550 8,661,668 7,574,543 14%

Funds from
operations(1) 40,339 669,042 3,347,136 2,526,628 32%
Per Share - Basic
and diluted ($ per
share) 0.00 0.02 0.09 0.08 13%

Net loss(2)(3) 5,648,720 596,524 13,307,829 2,390,243 457%
Per Share - Basic
and diluted ($ per
share) 0.16 0.02 0.37 0.08 363%

Capital Expenditures 2,930,471 3,933,397 6,846,024 13,748,007 (50%)
Proceeds on property
dispositions(3) (39,589) 1,569,116 14,101,139 1,569,116 799%

Total assets 30,855,363 58,110,542 30,855,363 58,110,542 (47%)

Working capital
deficit(4) 1,898,470 3,010,215 1,898,470 3,010,215 (37%)

Bank debt - 9,483,071 - 9,483,071 -

Weighted average
shares outstanding
Basic 35,691,669 31,603,345 35,691,669 31,188,083 14%
Diluted 35,691,669 31,603,345 35,691,669 31,188,083 14%

Three Months Ended Year Ended
December 31, December 31,
$ 2008 2007 2008 2007 Change

Average Daily Production(5)
Crude oil and NGLs
(bbls/d) 144 136 139 137 1%
Natural gas (mcf/d) 868 2,059 1,340 1,917 (30%)
Barrels of oil equivalent
(BOE/d) 289 479 362 457 (21%)

Average Product Prices
Crude oil and NGLs
($/bbl) 47.15 60.65 83.42 54.66 53%
Natural gas ($/mcf) 6.72 6.28 8.82 6.72 31%
Combined ($/BOE) 43.72 44.22 64.59 44.64 45%

Proven and probable
Crude oil and NGLs
(barrels) 758,000 712,000 7%
Natural gas (Mcf) 2,399,000 10,526,000 (77%)
Combined (BOE) 1,159,000 2,466,000 (47%)

Net present value,
Discounted @ 10%, before
tax 22,219,000 32,799,000

Netback ($/BOE)(6) 17.47 24.89 39.11 26.51 48%

Wells Drilled
Gross - 2 6 6 0%
Net - 1.10 3.10 2.25 38%

Success - 100% 95% 96% (1%)

Undeveloped land
(net acres) 38,882 51,774 38,882 51,774 (25%)

(1) The fourth quarter of 2008 funds from operations include a severance payment of $198,000 and a prior period adjustment to operating costs of $62,000, both of which are one time charges.

(2) Net loss in 2008 of $13.3 million includes a $9.3 million accounting loss on the Smoky property disposition and a $6.4 million non-cash impairment write-down on the Company's oil and natural gas properties.

(3) On May 30, 2008, Churchill closed the sale of its operated property in Smoky, Alberta. Under full cost accounting, if crediting the proceeds from disposition to costs results in a change of 20 percent or more to the DD&A rate then a gain or loss should be recognized. When a gain or loss is to be recognized the total net book value of capitalized costs should be allocated between the properties sold and properties retained. The sale resulted in an adjustment to the book value of properties and equipment of $28.5 million and an adjustment to accumulated DD&A of $5.1 million. Churchill received net proceeds of $14.1 million resulting in a loss on sale of assets of $9.3 million.

(4) Excludes bank debt and the risk management contracts.

(5) For the year ended December 31, 2008, operations include Smoky production volumes from January 1, 2008 to May 30, 2008.

(6) Before realized gains and losses on financial instruments.

Churchill is a Calgary-based junior oil and natural gas company headquartered in Calgary. Our focus is the exploration, development and exploitation of hydrocarbon reserves in the Western Canadian Sedimentary basin. The common shares of Churchill are listed on the TSX Venture Exchange and trade under the symbol "CEI".

Forward Looking Information and Statements

This news release contains certain forward-looking information and statements within the meaning of applicable securities laws. The use of any of the words "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "project", "should", "believe", "plans", "intends", "strategy" and similar expressions are intended to identify forward-looking information or statements. In particular, but without limiting the foregoing, this news release contains forward-looking information and statements pertaining to the following: the volumes and estimated value of Churchill's oil and gas reserves; the life of Churchill's reserves; the volume and product mix of Churchill's oil and gas production; future oil and natural gas prices and Churchill's commodity risk management programs; the amount of future asset retirement obligations; future liquidity and financial capacity; future results from operations and operating metrics; future costs, expenses and royalty rates; future interest costs; future development, exploration, acquisition and development activities (including drilling plans) and related capital expenditures and future taxes payable by Churchill; and Churchill's tax pools.

The forward-looking information and statements contained in this news release reflect several material factors and expectations and assumptions of Churchill including, without limitation: that Churchill will continue to conduct its operations in a manner consistent with past operations; the general continuance of current industry conditions; the continuance of existing (and in certain circumstances, the implementation of proposed) tax, royalty and regulatory regimes; the accuracy of the estimates of Churchill's reserve and resource volumes; certain commodity price and other cost assumptions; and the continued availability of adequate debt and equity financing and cash flow to fund its plans expenditures; Churchill believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable but no assurance can be given that these factors, expectations and assumptions will prove to be correct.

The forward-looking information and statements included in this news release are not guarantees of future performance and should not be unduly relied upon. Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information or statements including, without limitation: changes in commodity prices; changes in the demand for or supply of Churchill's products; unanticipated operating results or production declines; changes in tax or environmental laws, royalty rates or other regulatory matters; changes in development plans of Churchill or by third party operators of Churchill's properties, increased debt levels or debt service requirements; inaccurate estimation of Churchill's oil and gas reserve and resource volumes; limited, unfavorable or a lack of access to capital markets; increased costs; a lack of adequate insurance coverage; the impact of competitors; and certain other risks detailed from time to time in Churchill's public disclosure documents (including, without limitation, those risks identified in this news release).

The forward-looking information and statements contained in this news release speak only as of the date of this news release, and none of Churchill or its subsidiaries assumes any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws.

BOEs 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 a value equivalency at the wellhead.

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

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