Compass Petroleum Ltd.
TSX VENTURE : CPO

Compass Petroleum Ltd.

November 25, 2010 04:00 ET

Compass Petroleum Ltd. Announces Financial and Operating Results for the First Quarter of Fiscal 2011

CALGARY, ALBERTA--(Marketwire - Nov. 25, 2010) - Compass Petroleum Ltd. (TSX VENTURE:CPO) ("Compass" or the "Company") announced today that it has released its financial and operating results for the quarter ended September 30, 2010.

The Company has filed its unaudited interim financial statements for the quarter ended September 30, 2010 (the "Financial Statements") and related Management's Discussion and Analysis ("MD&A") with certain securities regulatory authorities in Canada. A copy of the Financial Statements and MD&A may be obtained via the System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com (under the Company's profile) and on the Company's website at www.compasspetroleum.com.

Selected financial and operating information for the quarter ended September 30, 2010 (and 2009 comparative information) is set out below, which should be read in conjunction with the Financial Statements and MD&A.

Fiscal 2011 Q1 Highlights

Highlights of the Company's activities in the first quarter of fiscal 2011 were as follows:

- Refocused Company activity and operational emphasis on the emerging Viking light oil resource play in the Dodsland area of west central Saskatchewan using horizontal drilling and multi-stage fracturing technology.

- Drilled and cased four (net 4.0) and completed six (net 6.0) Viking horizontal wells in the Dodsland area.

- Commenced production of Viking light oil from the Company's Lucky Hills property (averaged an aggregate of 176 barrels of oil per day ("bopd") in the quarter from five wells).

- Increased average production to 864 barrels of oil equivalent per day ("boepd"), up 13% sequentially from Q4 fiscal 2010; oil weighting increased from 48% in the first quarter of fiscal 2010 to 60% in the first quarter of fiscal 2011.

- Acquired 6.5 sections (net 5.5) of undeveloped land in the greater Dodsland area.

- Drilled one (net 1.0) Sawtooth oil well in the Grand Forks area of southern Alberta.

Operating and Financial Highlights Subsequent to Quarter End

In late September, 2010, Compass commenced a fall 2010 Viking light oil horizontal well drilling program at Lucky Hills. To date, seven wells have been drilled and cased. Due to the unavailability of fracturing services, only four of these wells have been completed. It is anticipated that the three remaining wells will be completed by early December 2010, subject to the availability of fracturing services. In October 2010, pipeline tie-ins for solution gas produced from five Viking horizontal oil wells were completed and solution gas sales commenced in early November 2010. Including solution gas sales, estimated field production in the first week of November 2010 from the first six wells drilled in Q1 of fiscal 2011 averaged 354 boepd. Initial production rates on four recently completed Viking horizontal wells are considered by management to be encouraging.

The Company continued to expand its undeveloped land base on the Viking light oil resource play in west central Saskatchewan, acquiring an additional 9.75 net sections in October 2010. To date in fiscal 2011, Compass has added 16 net sections of undeveloped land in the greater Dodsland area. In the Lucky Hills focus area, Compass has an average 96% working interest in 12,693 net acres (approximately 19.8 sections) of land with Viking mineral rights and an average 98% working interest in a total of 34,534 net acres (approximately 53.9 sections) of land in west central Saskatchewan with Viking mineral rights.

The successful Sawtooth oil well drilled at Grand Forks was completed in October 2010 and tested at an initial rate of about 40 bopd.

Two crude oil price hedges have been entered for calendar 2011. One is a price collar for 200 bopd with a floor of CDN $80 per barrel and a ceiling of CDN $94.95 per barrel. The second hedge is for 150 bopd with a fixed price swap of CDN $88.60 per barrel.

The Company has renewed its banking facility with its principal lender for fiscal 2011 at $20 million, consisting of a $17 million revolving demand loan and a $3 million acquisition line. The facility is not scheduled to be reviewed again until October 2011.

Compass received TSX Venture Exchange approval to implement a normal course issuer bid, under which the Company may purchase up to 1,601,175 Common Shares (or 5% of the total number of Common Shares currently outstanding) from time to time commencing on November 17, 2010 and continuing until November 16, 2011.




Summary of Operations
(Thousands except per share amounts) Three Months Ended
September 30
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2010 2009
Financial
Petroleum and natural gas sales $ 4,094 $ 3,797
Cash provided by operating activities 1,693 791
Funds from operations(1) 1,265 1,221
per share, (basic and diluted) 0.04 0.06
Loss for the period (526) (315)
per share, (basic and diluted) (0.02) (0.01)

Capital additions 6,857 1,369
Dispositions (260) -
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Net capital additions 6,597 1,369

Net adjusted working capital/(net debt)(1) (2,053) 3,331(2)
Convertible notes -face value 10,920 10,920

Total assets 63,713 61,648(2)
Total shares outstanding at quarter end 32,023,519 23,938,294

Operations

Production
Gas (Mcfpd) 2,056 3,247
Oil (bblpd) 521 404
boepd (6Mcf = 1bbl) 864 946
Product Prices
Gas ($/Mcf) $ 3.53 $ 2.91
Oil ($/bbl) $ 66.12 $ 62.04

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(1) Refer to the section"Non-GAAP Financial Measurements".
(2) as of June 30, 2010


Financial

Oil and gas revenue increased to $4.094 million in Q1 of fiscal 2011 compared with $3.797 million for Q1 of fiscal 2010. Higher average commodity prices and a higher weighting of crude oil accounted for the increased revenues despite lower overall production volumes.

Funds from operations increased nominally to $1.265 million (or $0.04 per share) in Q1 of fiscal 2011, compared with $1.221 million (or $0.06 per share) in Q1 of fiscal 2010. Compass reported a loss of $0.526 million in the first quarter of fiscal 2011 or ($0.02) per share compared with a loss of $0.315 million or ($0.01) per share for the same period in fiscal 2010. The increased loss was primarily due to higher DD&A charges and accretion expenses in the quarter compared to the same quarter in fiscal 2010.

The Company incurred approximately $6.597 million of net capital expenditures in Q1 of fiscal 2011 compared to net capital expenditures of $1.369 million in Q1 of fiscal 2010.

At quarter end, Compass did not have any outstanding bank debt. The Company's working capital deficiency was $1.951 million at September 30, 2010.

Production

The Company's average production for the three month period ended September 30, 2010 decreased by 9% to 864 boepd from 946 boepd for the three months ended September 30, 2009. However, sequentially, production increased 13% from Q4 of fiscal 2010. The Company's crude oil weighting in Q1 of fiscal 2011 increased to 60% of overall production from 43% in Q1 of fiscal 2010.

Outlook

The Company has shifted its primary focus to the development and exploitation of its light oil Viking resource lands at Lucky Hills in the Dodsland area of west central Saskatchewan, utilizing horizontal drilling and multi-stage fracturing technology. A total of nineteen horizontal Viking oil wells have been budgeted for drilling and completion in fiscal 2011. To date, 11 of these wells have been drilled. Six wells are currently on production, including two wells drilled in fiscal 2010. Four wells were recently completed and three wells are expected to be completed by early December 2010, subject to the availability of fracturing services. The Company is targeting an overall December 2010 exit production rate of 1,100 boepd to 1,200 boepd.

Subsequent to quarter end, the Company announced that Mr. Bruce M. Beynon (M.Sc.,P.Geol) was appointed as Vice President, Exploration. Mr. Beynon brings over 21 years of exploration leadership and management experience and was previously the President of two junior oil and gas companies.

NON-GAAP FINANCIAL MEASUREMENTS

This news release includes references to "funds from operations". Funds from operations is a non-GAAP measure that is commonly used in the oil and natural gas industry. It represents cash provided by operating activities before changes in non-cash working capital and asset retirement expenditures. The Company considers funds from operations to be a key measure as it demonstrates the ability of the business to generate the cash flow necessary to fund future growth through capital investment and to repay debt. Funds from operations should not be considered as an alternative to, or more meaningful than, cash flow provided by operating activities as determined in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") as an indicator of the Company's performance. The Company's determination of funds from operations may not be comparable to that reported by other issuers.

The Company calculated "funds from operations" as follows for the periods indicated:




Quarter ended Quarter ended
September 30, 2010 September 30, 2009
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Cash provided by operating activities $ 1,693,254 $ 791,319
Changes in non-cash working capital (480,126) 398,846
Actual retirement obligation settled 52,359 30,459
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Funds from operations $ 1,265,487 $ 1,220,624


This news release also includes references to "adjusted working capital" and "net debt", which is defined as current liabilities (excluding future income taxes) plus outstanding bank debt less current assets (excluding financial instruments), as a measure of short term liquidity. The Company calculated "adjusted working capital and net debt" as follows at the dates noted:



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September 30, June 30,
2010 2010
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Current assets
(excluding financial instruments) $ 5,101,491 $ 7,861,490
Banks indebtedness - -
Accounts payable and accrued liabilities
(excluding future income taxes) (7,154,474) (4,530,332)
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Adjusted working capital / (net debt) $(2,052,903) $ 3,331,158
Where "net debt" is positive the Company uses the term "adjusted working
capital and net debt".
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OTHER MEASUREMENTS

Reported production represents Compass' ownership share of sales before the deduction of royalties. Where amounts are expressed on a barrel of oil equivalent ("boe") basis, natural gas has been converted at a ratio of six thousand cubic feet to one boe. This ratio is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Boe's may be misleading, particularly if used in isolation. References to natural gas liquids ("liquids") include condensate, propane, butane and ethane and one barrel of liquids is considered to be equivalent to one boe.

Compass is an oil weighted, oil focused junior oil and gas exploration and production corporation based in Calgary, Alberta. The Company's current main focus is on the exploitation and development of its Viking light oil resource lands in the Dodsland area of west central Saskatchewan.

ADVISORY REGARDING FORWARD LOOKING STATEMENTS

This news release contains certain forward-looking information (referred to herein as "forward-looking statements") within the meaning of applicable Canadian securities laws. Forward-looking statements are often, but not always, identified by the use of words such as "anticipate", "plan", "intend", "estimate", "expect", "may", "will", "should", or similar words suggesting future activities, circumstances or outcomes. In particular, this news release contains forward-looking statements relating to: (1) expectations with respect to the completion of wells by early December 2010; (2) the number of wells budgeted for drilling in fiscal 2011; and (3) expectations with respect to the Company's overall production by the end of calendar 2010.

Forward-looking statements are based upon the opinions and expectations of management of the Company as at the effective date of such statements and, in some cases, information supplied by third parties. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions and that information received from third parties is reliable, it can give no assurance that those expectations will prove to have been correct. Forward-looking statements are subject to certain risks and uncertainties that could cause actual events or outcomes to differ materially from those anticipated or implied by such forward-looking statements. These factors include, but are not limited to, such things as changes in general economic conditions in Canada, the United States and elsewhere, changes in operating conditions (including as a result of weather patterns), the volatility of prices for oil and gas and other commodities, commodity supply and demand, fluctuations in currency and interest rates, inherent risks associated with the exploration, development and production of oil and gas (including mechanical problems), timing, results and costs of exploration and development activities, the accuracy of geological and geophysical data and the Company's interpretation of that data, availability of financial resources or third-party financing, availability of equipment, materials, services and personnel, defaults by counterparties under commercial arrangements to which the Company is a party, the ability to obtain all required regulatory approvals on a timely basis and on satisfactory terms, and new laws and regulations (domestic and foreign). Accordingly, readers should not place undue reliance upon the forward-looking statements contained in this news release and such forward-looking statements should not be interpreted or regarded as guarantees of future outcomes.

Forward-looking statements concerning the number of wells expected to be completed by the Company by early December 2010 are based upon various assumptions and factors including the results of horizontal wells drilled to date by the Company in west central Saskatchewan, the time required to complete wells previously drilled by the Company in west central Saskatchewan, the Company's experience with the drilling of other oil and gas wells, the availability of materials, services, equipment and personnel in a timely manner and on commercial terms acceptable to the Company, favorable weather conditions (including access to well sites and leases), and the ability of the Company to obtain all required regulatory approvals in a timely manner and on satisfactory terms.

Forward-looking statements concerning the number of wells budgeted for drilling in fiscal 2011 is based upon various assumptions and factors including the current capital budget approved by the board of directors of the Company (which is subject to change), that the Company's success rate on new wells drilled in west central Saskatchewan will be substantially similar to the success rates historically achieved by the Company on wells drilled in west central Saskatchewan, the accuracy of geological and geophysical data and the Company's interpretation of that data, the availability of materials, services, equipment and personnel in a timely manner and on commercial terms acceptable to the Company, the ability to obtain all required regulatory approvals on a timely basis and on satisfactory terms, prices for oil and natural gas remaining at current levels or increasing above current levels, no adverse changes in royalties payable on oil and gas production, the Company's ability to economically produce oil and gas from its properties and the timing and costs of such production, that production from new wells drilled by the Company will be substantially consistent with wells drilled by Compass and others in the vicinity of such new wells, the ability of the Company to generate internal cash flow, and the availability of external financing on terms satisfactory to the Company.

Forward-looking statements concerning forecast production as at December 31, 2010 is based upon various assumptions and factors including the Company's current production from its various properties, existing plans for the completion of wells in calendar 2010, Compass' historical success rate with wells drilled on its properties in west central Saskatchewan, the results of wells drilled by third parties in the vicinity of Compass' oil and gas properties in west central Saskatchewan (including production from those wells), that production from new wells drilled by Compass will be substantially consistent with wells drilled by Compass and others in the vicinity of such new wells, prices for oil and natural gas remaining at current levels or increasing above current levels, no adverse changes in royalties payable on oil and gas production, the Company's ability to economically produce oil and gas from its properties and the timing and costs of such production.

The forward-looking statements contained in this news release are made as of the date hereof and Compass does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, except as required by applicable Canadian securities law. The forward-looking statements contained herein are expressly qualified by this cautionary statement.

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

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