Compass Petroleum Ltd.
TSX VENTURE : CPO

Compass Petroleum Ltd.

February 23, 2011 19:15 ET

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

CALGARY, ALBERTA--(Marketwire - Feb. 23, 2011) - Compass Petroleum Ltd. ("Compass" or the "Company") (TSX VENTURE:CPO) announced today its financial and operating results for the quarter ended December 31, 2010.

The Company has filed its unaudited interim financial statements for the three and six month periods ended December 31, 2010 (the "Financial Statements") and related Management's Discussion and Analysis ("MD&A") with certain securities regulatory authorities in Canada. Copies 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 interim periods ended December 31, 2010 (and 2009 comparative information) is set out below, which should be read in conjunction with the Financial Statements and MD&A.

Fiscal 2011 Q2 Highlights

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

- Accelerated activity and operations at Lucky Hills (approximately 19.8 net sections) on the Company's Viking light oil resource play in the Dodsland area of west central Saskatchewan.

- Drilled and cased seven (net 7.0) and completed six (net 6.0) Viking horizontal wells at Lucky Hills in the Dodsland area. One well was not completed by the end of December 2010 due to delays in the availability of fracturing services.

- Increased average sales to 895 barrels of oil equivalent per day ("boepd"), up 4% sequentially from Q1 fiscal 2011; oil weighting averaged 62% in the second quarter of fiscal 2011.

- December 2010 sales averaged 997 boepd, weighted 67% to oil. Viking light oil sales from Lucky Hills averaged 321 barrels of oil per day ("bopd") in December 2010. Oil inventory equivalent to 142 bopd of Viking light oil production remained unsold at December 31, 2010 due to pipeline constraints.

- Constructed pipelines to transport Viking solution gas from four Viking horizontal oil wells to the Company's 100% owned gas plant at Lucky Hills.

- Constructed and installed a 100% owned oil treating facility at Lucky Hills for Viking light oil production.

- Acquired 14.0 sections (net 14.0) of undeveloped land in the greater Dodsland area, increasing the Company's total inventory to approximately 58 net sections with Viking mineral rights in west central Saskatchewan.

- Renewed the Company's credit facilities with its principal lender at an aggregate of $20 million.

Operations

Compass successfully drilled and cased seven Viking horizontal (7.0 net) wells at Lucky Hills in the second quarter of fiscal 2011. This brings the total to 13 successful Viking horizontal wells (11 in fiscal 2011) drilled through the end of December 31, 2010. Management believes that the drilling successes achieved to date have significantly reduced various risks associated with the use of horizontal multistage fracturing technology on its lands in the Dodsland area of Saskatchewan. Management of the Corporation has identified in excess of 150 potential horizontal drilling locations (assuming 8 wells per section) at Lucky Hills.

Due to the high demand for fracturing services in November/December 2010 and resulting scheduling delays, four of the seven Viking horizontal wells were completed in November, two were completed in December and one remained uncompleted at December 31, 2010. All of the wells were completed utilizing 14-15 stage, nitrogen foamed, water base fracs of 15 tonnes per stage. Of the 12 completed Viking horizontal wells, only two wells have been equipped with pumping equipment as of December 31, 2010. Three of the wells have been flowing since August 2010. Management expects to utilize pumping equipment on the flowing wells once production rates decline to a level that justifies the capital expenditures.

Pipeline construction to tie-in solution gas from four Viking horizontal oil wells and one Viking horizontal gas well (to the Company's 100% owned Lucky Hills gas facility) was completed during the second quarter of fiscal 2011 and Viking gas sales commenced in November 2010. The Company's expanded pipeline infrastructure and gas facility allows Compass to conserve solution gas produced by the affected wells. Conservation of solution gas produced in Saskatchewan will become necessary when the Saskatchewan Energy and Resources' gas conservation directive (S-10) comes into effect (scheduled for October 1, 2011). Solution gas from three third party wells was also tied into the Company's facilities at Lucky Hills in the second quarter of fiscal 2011.

During the quarter ended December 31, 2010, an oil treating facility was constructed and installed at Lucky Hills. This facility processes Viking light oil production for direct delivery to the pipeline terminal. With the oil treating facility, Compass has been able to eliminate various third-party processing fees and thereby reduce operating costs. The facility has a current treating capacity of 750 bopd, but can be expanded to 1,000 bopd.

December 2010 sales from the Lucky Hills Viking horizontal wells totaled 392 boepd, including 321 bopd of light oil, compared to September 2010 sales of 221 bopd. At December 31, 2010, there was unsold inventory equivalent to 142 bopd in tanks at Lucky Hills due to pipeline delivery constraints and apportionment issues.

Compass acquired a total of of 14.0 net sections of undeveloped land in the second quarter of fiscal 2011 in the greater Dodsland area, which increased the Company's overall Viking resource play land inventory to approximately 58 net sections of land in west central Saskatchewan.



Summary of Operations
(Thousands except per share amounts) Three Months Ended December 31
--------------------------------
2010 2009

Financial

Petroleum and natural gas sales $4,584 $3,868
Cash provided by operating activities 627 1,452
Funds from operations (1) 1,498 1,281
per share, (basic and diluted) 0.05 0.05
Loss for the period (900) (407)
per share, (basic and diluted) (0.03) (0.02)

Capital additions 11,247 1,850
Dispositions - -
---------------------------------------------------------------------------
Net capital additions 11,247 1,850

Net adjusted working capital/(net debt) (1) (11,496) 3,331 (2)
Convertible notes - face value 10,920 10,920

Total assets 72,464 61,648 (2)
Total shares outstanding at
quarter end - basic 32,320,186 23,938,294
Total shares outstanding at quarter end
- fully diluted 44,434,075 34,872,183

Operations

Production
Gas (Mcfpd) 2,087 2,958
Oil (bblpd) 547 404
boepd (6Mcf = 1bbl) 895 897
Product Prices
Gas ($/Mcf) $3.37 $4.24
Oil ($/bbl) $72.36 $66.53
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Refer to the section Non-GAAP Financial Measurements.
(2) As of June 30, 2010.



Six Months Ended December 31
--------------------------------
2010 2009

Financial

Petroleum and natural gas sales $8,678 $7,665
Cash provided by operating activities 2,321 2,243
Funds from operations (1) 2,763 2,502
per share, (basic and diluted) 0.09 0.10
Loss for the period (1,426) (723)
per share, (basic and diluted) (0.04) (0.03)

Capital additions 18,104 3,219
Dispositions 260 -
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Net capital additions 17,844 3,219

Net adjusted working capital/(net debt) (1) (11,496) 3,331 (2)
Convertible notes - face value 10,920 10,920

Total assets 72,464 61,648 (2)
Total shares outstanding at
quarter end - basic 32,320,186 23,938,294
Total shares outstanding at quarter end
- fully diluted 44,434,075 34,872,183

Operations

Production
Gas (Mcfpd) 2,070 3,105
Oil (bblpd) 535 405
boepd (6Mcf = 1bbl) 880 923
Product Prices
Gas ($/Mcf) $3.56 $3.63
Oil ($/bbl) $69.23 $64.27
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Refer to the section Non-GAAP Financial Measurements.
(2) As of June 30, 2010.


Financial and Corporate

Oil and gas revenue increased to $4.584 million in Q2 of fiscal 2011 compared with $3.868 million for Q2 of fiscal 2010. For the six month period ended December 31, 2010, oil and gas revenue increased to $8.678 million compared to $7.665 million for the six months ended December 31, 2009. Higher average crude oil prices and a higher weighting of production to crude oil accounted for the increased revenues despite lower overall production volumes.

Funds from operations increased to $1.498 million (or $0.05 per share) in Q2 of fiscal 2011, compared to $1.281 million (or $0.05 per share) in Q2 of fiscal 2010. For the six month period ending December 31, 2010, funds from operations increased to $2.763 million (or $0.09 per share) compared to $2.502 million (or $0.10 per share) for the six months ending December 31, 2009. Compass reported a loss of $0.900 million in the second quarter of fiscal 2011 (or ($0.03) per share) and $1.426 million (or ($0.04) per share) for the first six months of fiscal 2011 compared with a loss of $0.407 million (or ($0.02) per share) and $0.723 million (or ($0.03) per share) respectively for the same periods in fiscal 2010. The increased loss was primarily due to higher unrealized marked to market losses on commodity price hedges and higher depletion, depreciation and amortization charges for the three and six month periods ended December 31, 2010 compared to the same periods in fiscal 2010.

The Company incurred approximately $11.247 million of net capital expenditures in Q2 of fiscal 2011 compared to net capital expenditures of $1.85 million in Q2 of fiscal 2010. The increased expenditures were incurred in connection with the drilling and casing of seven Viking horizontal wells, completion of six Viking horizontal wells, pipeline construction to tie-in five Viking wells, construction of a Viking light oil treating facility, the acquisition of undeveloped lands in west central Saskatchewan, and the equipping and tie-in of a Sawtooth oil well at Grand Forks, Alberta.

At quarter end, Compass had outstanding indebtedness of approximately $4.2 million to its principal lender. The Company's net debt was $11.496 million at December 31, 2010, most of which was incurred in connection with the Company's horizontal drilling program in west central Saskatchewan and the other operational initiatives discussed above in this news release.

During the quarter ended December 31, 2010, two crude oil price hedges were established for calendar 2011. One is a price collar for 200 bopd with a floor of $80 per barrel and a ceiling of $94.95 per barrel. The second hedge is for 150 bopd with a fixed price swap of $88.60 per barrel.

During the second quarter of fiscal 2011, the Company also renewed its loan 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.

In November 2010, 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 from time to time during the period from November 17, 2010 to November 16, 2011. During the quarter, a total of 10,300 Common Shares were acquired under the normal course issuer bid.

In Q2 of fiscal 2011, the Company entered into a settlement agreement with certain former shareholders of Los Altares Resources Ltd. ("Los Altares") who exercised statutory rights of dissent in connection with the October 2007 amalgamation involving the Company, Los Altares and a subsidiary of the Company. An aggregate of 306,967 Common Shares were issued under the settlement agreement.

Production

The Company's average production for the three month period ended December 31, 2010 was flat (895 boepd versus 897 boepd) compared to the three months ended December 31, 2009. However, the Company's crude oil weighting increased from 45% in Q2 fiscal 2010 to over 60% in Q2 fiscal 2011. In December 2009, Compass essentially had no weighting of light oil production; by the end of December 2010, approximately 48% of oil sales was attributable to Viking light oil production.

With the emphasis and focus on Viking light oil, the Company's natural gas production has decreased from approximately 55% for Q2 fiscal 2010 to under 40% for Q2 fiscal 2011. This trend is expected to continue as there are no expenditures budgeted for natural gas related activities.

Outlook

The Company closed a successful financing in January 2011, which involved the sale of 11,896,552 Common Shares, at a price of $1.45 per share, for gross proceeds of $17.25 million. The net proceeds of the financing were initially used to reduce the Company's indebtedness under its loan facility, resulting in positive working capital of approximately $5.5 million at January 31, 2011.

Compass recommenced its fiscal 2011 Viking horizontal drilling program at Lucky Hills early in January 2011 and has drilled and cased eight (net 8.0) wells since the end of December 2010. This completes the originally budgeted 19 Viking horizontal wells for fiscal 2011. With the recent financing, 3 - 4 net additional Viking horizontal wells are scheduled to be drilled by the end of fiscal 2011 (June 30, 2011), subject to timely receipt of all necessary regulatory approvals and weather permitting. The Company is also planning to drill 2 - 3 net vertical Viking "strat" tests to evaluate prospective acreage outside of the main Lucky Hills block. Since December 31, 2010, the Company acquired a further seven net sections of undeveloped land in the greater Dodsland area and the Company's business plan contemplates the continued dedication of resources to the expansion of its exposure to the Viking light oil resource play in west central Saskatchewan.

Compass anticipates that all of the wells that it has drilled and cased to date in west central Saskatchewan will be completed by March 31, 2011, as the availability of fracturing services appears to have improved in recent weeks. To date, six new wells and one well drilled in the second quarter of fiscal 2011 have been completed and are being tested or placed on production. Test rates on two of the new wells drilled at Lucky Hills in the Dodsland area have exceeded management's expectations and are the highest achieved by Compass to date for horizontal wells employing multistage fracturing technology. The Company continues to optimize production operations and production rates. Pumping equipment has been recently installed on several flowing wells as production rates have declined. Several techniques to handle wax issues associated with the Viking crude oil have also been instituted. Other activities initiated in Q3 of fiscal 2011 include pipeline construction to tie-in solution gas from 7 - 9 Viking horizontal oil wells and the expansion of the oil treating facility at Lucky Hills.

The Board of Directors has approved an increase to the Company's capital budget for fiscal 2011 to $35.1 million from $29.6 million. All of the increased expenditures will be directed for activities at Lucky Hills including the drilling of up to 4 net Viking horizontal wells.

The Company's production volumes have been building since December 2010. For the first 19 days of February 2011, production averaged 1,260 boepd including 969 bopd of oil (greater than 75% oil weighting) based on field estimates. Compass is targeting an overall June 2011 exit production rate of 1,350 boepd to 1,450 boepd, subject to timely completion of drilling, completion and other activities noted above in this news release and assuming no constraints in delivering production to sales points or pipeline apportionment issues.

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. Management of 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 Six Months Quarter Six Months
ended Ended ended Ended
December 31, December 31, December 31, December 31,
2010 2010 2009 2009
----------------------------------------------------------------------------

Cash provided by
operating activities $627,399 $2,320,653 $1,451,798 $2,243,117
Changes in non-cash
working capital 669,073 188,947 (170,891) 227,955
Actual retirement
obligation settled 201,298 253,657 - 30,459
----------------------------------------------------------------------------
Funds from operations $1,497,770 $2,763,257 $1,280,907 $2,501,531


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 and future income taxes), as a measure of short term liquidity. The Company calculated "adjusted working capital and net debt" as follows at the dates noted:



----------------------------------------------------------------------------
----------------------------------------------------------------------------
December 31, June 30,
2010 2010
----------------------------------------------------------------------------
Current assets
(excluding financial instruments &
future income taxes) $3,876,672 $7,861,490
Banks indebtedness (4,200,000) -
Accounts payable and accrued liabilities
(excluding future income taxes &
financial instruments) (11,173,026) (4,530,332)
----------------------------------------------------------------------------
Adjusted working capital / (net debt) $(11,496,354) $3,331,158

Where "net debt" is positive the Company uses the term "adjusted working
capital and net debt".

----------------------------------------------------------------------------
----------------------------------------------------------------------------


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.

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) the anticipated timing of review of the Company's existing loan facilities by its principal lender; (2) continued decreases in the percentage of natural gas produced by the Company as compared to oil production; (3) expectations concerning the drilling of additional wells by the Company and the continued dedication of resources to the expansion of the Company's Viking light oil resource play in west central Saskatchewan; (4) anticipated timing of completion of wells drilled and cased to date in west central Saskatchewan; and (5) expectations with respect to the Company's overall production by the end of June 2011.

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 risks and uncertainties 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 in a timely manner and on terms acceptable to the Company, 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 anticipated timing of review of the Company's existing loan facilities by its principal lender are based upon various assumptions and factors, including the terms of existing agreements between the Company and its principal lender and discussions between representatives of the Corporation and its principal lender.

Forward-looking statements concerning continued decreases in the percentage of natural gas produced by the Company as compared to oil production are based upon various assumptions and factors, including recent trends in the relative production of oil and natural gas by the Company, current production of oil and natural gas by the Company, the current business plan of the Company (which contemplates the continued dedication of significant corporate resources to the development of the Viking light oil play in west central Saskatchewan, but which is subject to change), a continuation of current commodity pricing over the period to which such forward-looking statements relate and anticipated declines in the production of natural gas from the Company's natural gas reserves.

Forward-looking statements concerning the drilling of additional wells by the Company and the continued dedication of resources to the expansion of the Company's Viking light oil resource play in west central Saskatchewan 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, 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, favorable weather conditions (including access to well sites and leases), the ability of the Company to obtain all required regulatory approvals in a timely manner and on satisfactory terms, the current business plan of the Company (which is subject to change), 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 the anticipated timing of completion of wells drilled and cased to date in west central Saskatchewan are 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), 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, favorable weather conditions (including access to well sites and leases) and the ability of the Company to generate internal cash flow.

Forward-looking statements concerning forecast production as at June 30, 2011 are based upon various assumptions and factors including the Company's current production from its various properties, existing plans for the drilling and completion of wells for the balance of fiscal 2011, 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 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, favorable weather conditions (including access to well sites and leases), the ability of the Company to obtain all required regulatory approvals in a timely manner and on satisfactory terms, the ability of the Company to generate internal cash flow, and the availability of external financing on terms satisfactory to the Company.

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.

Contact Information