Compass Petroleum Ltd.
TSX VENTURE : CPO

Compass Petroleum Ltd.

July 26, 2011 17:15 ET

Compass Petroleum Ltd. Announces Significant Reserve Growth, Fiscal 2012 Capital Budget and Operational Update

CALGARY, ALBERTA--(Marketwire - July 26, 2011) - Compass Petroleum Ltd. ("Compass" or the "Corporation") (TSX VENTURE:CPO) is pleased to announce the results of an independent evaluation of the Corporation's reserves, as at June 30, 2011 (the "Sproule Report"), prepared by Sproule Associated Limited ("Sproule") and an independent evaluation of the Corporation's undeveloped land holdings, as at June 30, 2011 (the "Seaton - Jordan Report"), prepared by Seaton – Jordan & Associates Ltd. ("Seaton – Jordan") . Additionally, the Corporation is pleased to announce that its Board of Directors has approved a fiscal 2012 capital budget, which assumes aggregate expenditures of $50.7 million.

Highlights of June 30, 2011 Sproule and Seaton – Jordan Reports

  • Total proved reserves increased by 78%, from 3.0 million barrels of oil equivalent ("MMboe") to 5.4 MMboe (67% oil)
  • Total proved plus probable reserves increased by 76%, from 4.6 MMboe to 8.0 MMboe (63% oil)
  • Production replacement ratio of 7.9 for proved reserves and 11.1 for proved plus probable reserves
  • Reserve life index of 15.3 years for proved reserves and 22.9 years for proved plus probable reserves, based on an annualized field reported June 2011 average production rate
  • The net present value of estimated future net revenues attributed to the Corporation's proved plus probable reserves (calculated using forecast prices and costs) increased 134% from $54.6 million to $128.0 million (10% discount rate) before tax and to $116.9 million (8% discount rate) after tax
  • Undeveloped land inventory of 89,726 net acres, of which 45,649 net acres are within the Viking light oil resource play areas at Lucky Hills and greater Dodsland in west central Saskatchewan
  • Undeveloped land inventory valued at $11.5 million in the Seaton – Jordan Report

Viking Light Oil Resource Play Reserve Additions

Fiscal 2011 was an active and transformational year for Compass. Strategically, the Corporation focused on evaluating, expanding and developing its Viking light oil resource play and significant reserve additions were achieved in relation to that play. Proved plus probable light oil reserves, as reported by Sproule, increased substantially from 68.1 thousand barrels ("Mbbl") to 3,142.9 Mbbl. The reserves attributed to the Viking play accounted for 62% of the Corporation's crude oil and natural gas liquids reserves at June 30, 2011. In the Sproule Report, reserves were assigned to a total of 76 Viking wells, including 52 locations with proved undeveloped and probable reserves. The Corporation's undeveloped Viking oil prone land inventory at June 30, 2011 was approximately 71.3 net sections.

Reserves Summary

The reserves data set out below is derived from the Sproule Report. The following tables set out information respecting the Corporation's estimated crude oil, natural gas liquids and natural gas reserves and the net present value of estimated future net revenues attributed to the Corporation's reserves at June 30, 2011, before income taxes and using forecast prices and costs. The Sproule Report has been prepared in accordance with the standards contained in the COGE Handbook and utilizes the reserves definitions contained in National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities ("NI 51-101").

All evaluations and reviews of the net present value of estimated future net revenues are stated prior to any provisions for interest costs or general and administrative costs and after deduction of estimated future capital expenditures for wells to which reserves have been assigned. It should not be assumed that the net present value of estimated future net revenues presented in the tables below represent the fair market value of the reserves. There is no assurance that the forecast prices and costs utilized in the preparation of the Sproule Report will be attained and variances from actual prices could be material. In addition, the recovery and reserve estimates of crude oil, natural gas liquids and natural gas reserves set out in the Sproule Report are estimates only and there is no guarantee that the estimated reserves will be recovered. Actual crude oil, natural gas liquids and natural gas reserves may be greater than or less than the estimates noted herein.

Light/Medium Oil Heavy Oil Natural Gas Liquids
Gross (1)
(Mbbl
) Net (2)
(Mbbl
) Gross (1)
(Mbbl
) Net (2)
(Mbbl
) Gross (1)
(Mbbl
) Net (2)
(Mbbl
)
Proved
Producing 834.8 735.7 753.3 618.5 18.1 11.9
Non-Producing 124.0 115.6 0.0 0.0 7.1 5.3
Undeveloped 1,684.8 1,480.1 176.9 152.0 1.1 0.9
Total Proved 2,643.6 2,331.5 930.2 770.5 26.3 18.1
Probable 1,199.0 1,037.2 252.8 191.9 18.6 12.8
Total Proved & Probable 3,842.6 3,368.7 1,183.0 962.4 44.9 30.9
Natural Gas Barrels of Oil Equivalent (3 )
Gross (1 ) Net (2 ) Gross (1) Net (2 )
(MMcf ) (MMcf ) (Mboe) (Mboe )
Proved
Producing 3,018 2,697 2,109.2 1,815.7
Non-Producing 1,025 942 302.0 278.0
Undeveloped 6,621 5,989 2,966.3 2,631.1
Total Proved 10,664 9,628 5,377.5 4,724.8
Probable 7,198 6,461 2,670.1 2,318.8
Total Proved & Probable 17,862 16,089 8,047.6 7,043.6

Notes:

  1. "Gross" reserves means the Corporation's working interest (operated and non-operated) share of reserves before deduction of royalties and before consideration of the Corporation's royalty interests.
  2. "Net" reserves means the Corporation's working interest (operated and non-operated) share of reserves after deduction of royalties and includes the Corporation's royalty interests.
  3. Oil equivalent amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil.
  4. Columns may not add due to rounding.

Estimated Net Present Reserve Values

The pretax net present values of the estimated future net revenues attributed to the Corporation's reserves (at various discount rates, effective June 30, 2011 and based on the June 30, 2011 Sproule forecast prices and costs) are summarized in the following table:

($ thousands) (1) 0 % 5 % 10 % 15 % 20 %
Proved
Producing 65,871 50,495 42,436 37,216 33,451
Non-Producing 10,044 8,493 7,366 6,516 5,853
Undeveloped 54,520 39,637 28,773 20,669 14,500
Total Proved 130,046 98,625 78,575 64,400 53,805
Probable 91,175 64,364 49,439 39,808 33,141
Total Proved & Probable 221,611 162,989 128,014 104,209 86,946

Notes:

  1. Net present value of estimated future net revenue includes all resource income including sale of crude oil, natural gas, and by-product reserves; processing third party reserves; and other income; and is stated before deducting future estimated site restoration costs, but reduced for estimated future abandonment costs and estimated capital for future development projects associated with the reserves.
  2. Columns may not add due to rounding.

Price Forecast

The June 30, 2011 Sproule price forecast is summarized in the following table:


Year
$US/$Cdn
Exchange Rate
WTI @ Cushing Edmonton Light Hardisty Bow River Natural Gas @ AECO-C Spot
($US/bbl ) ($Cdn/bbl ) ($Cdn/bbl ) ($Cdn/Mmbtu )
2011 (6 mos) 1.000 99.79 97.95 82.28 4.11
2012 1.000 101.50 99.64 83.70 4.41
2013 1.000 100.98 99.10 83.25 4.71
2014 1.000 97.91 96.02 80.65 5.63
2015 1.000 97.42 95.51 80.23 6.48
2016 1.000 99.37 97.44 81.85 6.62
2017 1.000 101.35 99.40 83.50 6.76
2018 1.000 103.38 101.41 85.18 6.91
2019 1.000 105.45 103.46 86.90 7.06
2020 1.000 107.56 105.55 88.86 7.21
2021 1.000 109.71 107.68 90.45 7.36
2022+ Escalation Rate of 2 %

Note:

Inflation is accounted for at 1.5% per year.

Reserves Reconciliation

The following reconciliation of the Corporation's estimated gross reserves compares changes in the Corporation`s estimated reserves as at June 30, 2010 to its estimated reserves as at June 30, 2011, based on the Sproule Report.

Light and Medium Oil Heavy Oil Natural Gas Liquids

Total Proved
Proved Plus Probable
Total Proved
Proved Plus Probable
Total Proved
Proved Plus Probable
(Mbbls ) (Mbbls ) (Mbbls ) (Mbbls ) (Mbbls ) (Mbbls )
June 30, 2010 434.7 801.9 1,095.2 1,418.2 30.8 46.0
Extensions & Improved Recovery 2,299.8 3,178.6 0.0 0.0 0.0 0.0
Discoveries 0.0 0.0 0.0 0.0 0.0 0.0
Technical Revisions 57.1 10.6 (79.7 ) (149.9 ) (1.5 ) 2.0
Acquisitions 0.0 0.0 0.0 0.0 0.0 0.0
Dispositions (1.5 ) (2.0 ) 0.0 0.0 (0.1 ) (0.2 )
Production (146.5 ) (146.5 ) (85.3 ) (85.3 ) (2.9 ) (2.9 )
June 30, 2011 2,643.6 3,842.6 930.2 1,183.0 26.3 44.9
Natural Gas Barrels of Oil Equivalent

Total Proved
Proved Plus Probable
Total Proved
Proved Plus Probable
(MMcf ) (MMcf ) (Mboe ) (Mboe )
June 30, 2010 8,804 13,817 3,028.0 4,568.9
Extensions & Improved Recovery 4,171 5,925 2,995.0 4,166.1
Discoveries 0 0 0.0 0.0
Technical Revisions (1,660 ) (1,229 ) (300.8 ) (342.1 )
Acquisitions 0 0 0.0 0.0
Dispositions (1 ) (1 ) (1.8 ) (2.4 )
Production (650 ) (650 ) (343.0 ) (343.0 )
June 30, 2011 10,664 17,862 5,377.4 8,047.5

Notes:

  1. "Gross" reserves means the Corporation's working interest (operated and non-operated) share of reserves before deduction of royalties and before consideration of the Corporation's royalty interests.
  2. Columns may not add due to rounding.

Land Holdings

During the fiscal year ended June 30, 2011, Compass was active in acquiring undeveloped acreage through acquisitions and Crown land sales in west central Saskatchewan, which activities focused primarily on lands having Viking oil potential. The Corporation retained Seaton – Jordan to complete an independent evaluation of the Corporation's undeveloped land holdings as at June 30, 2011 in compliance with NI 51-101 and the Companion Policy 51-101CP. The Seaton – Jordan Report has estimated the value of the Corporation's net undeveloped acreage at $11.5 million as set out in the following table:

Area Gross Acres Net Acres Value
Alberta 47,897 35,332 $2,912,520
Saskatchewan 62,884 54,394 $8,554,418
Total 110,781 89,726 $11,466,938

Undeveloped acreage within the Viking light oil resource play (located in west central Saskatchewan) comprises 45,649 net acres or 71.3 net sections.

Compass expects to comment on its finding, development and acquisition costs, operating netback, recycle ratios and net asset value when it announces its fiscal 2011 financial results (scheduled for early October 2011).

Operational Update

In Q4 fiscal 2011, Compass drilled and cased six gross (4.1 net) Viking horizontal wells. Three of these (2.5 net) were operated and three (1.6 net) were non-operated. The operated wells were drilled at Lucky Hills and were completed and placed on production by the end of June. One of the non-operated wells (0.6 net) was drilled at Whiteside and the other two (1.0 net) were drilled in the greater Dodsland area. The three non-operated wells were completed and placed on production in mid-July.

The construction of a second oil battery at Lucky Hills and the tie-in of 15 Viking oil wells to this battery were completed in the fourth quarter of fiscal 2011. These facilities were constructed to permit the conservation and sale of Viking solution gas and in an effort to reduce operating costs and improve operating efficiencies. During the last week of June 2011, field estimated sales averaged 1,100 boepd (70% oil) with three (1.6 net) Viking horizontal wells awaiting completion.

Fiscal 2012 Capital Budget and Outlook

The Board of Directors of Compass has approved a fiscal 2012 capital budget that contemplates aggregate expenditures of $50.7 million, including costs associated with the drilling of 38 net wells. The new fiscal budget assumes increases in 2012 average production by 72% over the fiscal 2011 average to approximately 1,600 boe/d (78% oil), with forecast exit volumes (June 30th, 2012) of approximately 1,800 to 1,900 boe/d. The capital program is expected to be financed by a combination of internally generated cash flow and bank debt.

At present, the fiscal 2012 drilling program primarily targets the development and expansion of the Viking light oil resource play at Lucky Hills and in the greater Dodsland area of west central Saskatchewan. The program currently anticipates that Compass will drill 24 gross (23.1 net) low risk development wells at Lucky Hills; eight (net) moderate risk step-out wells and six (net) higher risk exploratory wells in the greater Dodsland area. Funds are also budgeted for: (i) the expansion of pipeline infrastructure to tie-in Viking solution gas from new Viking oil wells; (ii) the construction of additional crude oil emulsion and produced water treating facilities; and (iii) undeveloped land and seismic acquisition.

The fiscal 2012 drilling program commenced on July 5 and three (3.0 net) Viking horizontal wells have been drilled and cased to date. Two of these wells are at Lucky Hills and one is south of Lucky Hills. This latter well is west of the Kindersley Viking oil pool and was drilled in an effort to de-risk additional undeveloped acreage in the greater Dodsland area. The three non-operated Viking horizontal oil wells drilled in fiscal Q4 (as noted above) have now been completed and have been placed on production. The drilling of the two successful wells in the greater Dodsland area has earned the Corporation working interests in 4.2 net sections of land. These wells have also allowed management to better assess potential of the greater Dodsland area lands for Viking oil and have added locations to the Corporation's overall Viking horizontal drilling inventory.

Solution gas sales from Lucky Hills were halted on June 30, 2011 due to hydrocarbon dewpoint issues associated with the richer Viking solution gas stream, which will require the construction of a pipeline to a third party processing facility that has the capacity to strip out liquids. Construction of this pipeline is expected to commence in late July 2011 with completion before the end of August 2011. Recent heavy rains in west central Saskatchewan have hampered field activities including drilling and completion operations. These delays will affect the timing of new production additions.

Management and the directors of Compass believe that the Corporation is well positioned with a strong balance sheet, a significant drilling inventory at Lucky Hills and a substantial undeveloped land base in the greater Dodsland area of west central Saskatchewan.

Reader Advisories

Barrels of Oil Equivalent (boe)

The term "boe" means barrel of oil equivalent, with natural gas converted to a crude oil equivalent at a ratio of six thousand cubic feet to one barrel. Boe's may be misleading, particularly if used in isolation. A boe conversion ratio of six Mcf (six thousand cubic feet) to one bbl (one barrel) is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Reserves and Operational Information

The reserves data set forth in this news release is based upon an independent reserve assessment and evaluation prepared by Sproule with an effective date of June 30, 2011 and dated July 15, 2011 and summarizes the Corporation`s crude oil, natural gas liquids and natural gas reserves and the net present values before income taxes of future net revenue for the Corporation`s reserves using forecast prices and costs based on the Sproule Report. The Sproule Report has been prepared in accordance with the standards contained in NI 51-101. All evaluations of future net cash flows are stated prior to any provisions for interest costs or general and administrative costs and after the deduction of estimated future capital expenditures for wells to which reserves have been assigned. It should not be assumed that the net present value of estimated future net revenues presented in this news release represent the fair market value of the reserves. There is no assurance that the forecast prices and costs assumptions will be attained and variances from actual costs could be material. The recovery and reserve estimates of our crude oil, natural gas liquids and natural gas reserves provided herein are estimates only and there is no guarantee that the estimated reserves will be recovered. Actual crude oil, natural gas and natural gas liquids reserves may be greater than or less than the estimates provided herein. The reserve data provided in this release only represents a summary of the disclosure required under NI 51-101. Additional disclosure will be provided in the Corporation`s Annual Information Form, which is scheduled to be filed with applicable securities regulatory authorities in Canada in early October 2011.

Forward-looking information and 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 or outcomes. In particular, this news release contains forward-looking statements relating to: (i) the fiscal 2012 capital budget of Compass, including plans to develop Compass' undeveloped reserves and the funding of future development costs; (ii) reserves and the net present values of estimated future net revenues from Compass' oil and natural gas reserves; (iii) the anticipated drilling of various Viking horizontal wells in the Lucky Hills and Dodsland areas of west central Saskatchewan; (iv) the timing of commencement and completion of the future construction projects; and (v) assumptions with respect to the Corporation's average production for the 2012 fiscal year and exit production as at June 30, 2012.

Forward-looking statements are based upon the opinions and expectations of management of the Corporation as at the effective date of such statements and, in some cases, information supplied by third parties. Although the Corporation 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 Corporation'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 Corporation, defaults by counterparties under commercial arrangements to which the Corporation 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.

Additional information concerning various assumptions and risk factors applicable to the forward looking statements contained in this news release are set out below.

  • Forward-looking statements respecting the fiscal 2012 capital budget of Compass, including plans to develop Compass' undeveloped reserves and the funding of future development costs, are based upon various assumptions and factors, including: (i) the continued ability of the Corporation to generate internal cash flow and that the sources of funding which Compass has relied upon in the past will continue to be available to Compass on acceptable terms, (ii) the absence of material changes in economic and operating conditions, including, but not limited to, commodity prices, (iii) the ability to market oil and natural gas to current and new customers (iv) the availability and cost of labour, (v) the ability to add production and reserves through acquisition, development and exploration activities and (vi) no material changes in currency exchange rates, interest rates, the regulatory framework regarding oil and natural gas royalties, environmental legislation and weather conditions. Such forward-looking statements are subject to certain risks, including declines in oil and natural gas prices, the inability of Compass to acquire additional reserves, uncertainty in credit and equity markets and the inability to access capital, the failure by counterparties to agreements with the Corporation to perform their contractual obligations, environmental claims and liabilities, the loss of key management, fluctuations in currency exchange rates and changes in legislation that affects the oil and natural gas industry.
  • Forward-looking statements relating to reserves and the estimated net present values of future net revenues from Compass' oil and natural gas reserves are based upon various assumptions and factors, including that the reserves described exist in the quantities estimated and can profitably be produced in the future. Such forward-looking statements are subject to certain risks, including: (i) the possibility that actual reserves will vary from reserve estimates and those variations could be material, (ii) declines in oil and natural gas prices, (iii) fluctuations in currency exchange rates; and (iv) changes in legislation that affects the oil and natural gas industry.
  • Forward-looking statements respecting the anticipated drilling of Viking horizontal wells in west central Saskatchewan are based upon various assumptions and factors, including the results of horizontal wells drilled to date by the Corporation in west central Saskatchewan, the time required to drill and complete existing wells and the assumption that future wells can be drilled and completed in similar time frames, the Corporation's experience with the drilling of other oil and natural gas wells, continued access to materials, services, equipment and personnel in a timely manner and on commercial terms acceptable to the Corporation, the ability to obtain all required regulatory approvals on a timely basis and on satisfactory terms, that the wells to be drilled in connection with the Corporation's fiscal 2012 drilling program will be capable of commercial production of hydrocarbons, the continued ability of the Corporation to generate internal cash flow and no new laws and regulations being enacted that would materially affect operations. Such forward-looking statements are subject to certain risks, including unexpected changes in economic or operating conditions or commodity prices, changes to environmental legislation or other laws, adverse weather conditions, inherent risks associated with the exploration, development and production of oil and natural gas (including mechanical and geological problems), availability of financial resources or third-party financing and the inability of the Corporation to access materials, services, equipment and personnel in a timely manner and on commercial terms acceptable to the Corporation.
  • Forward-looking statements concerning the anticipated timing of commencement and completion of certain future construction projects are based upon various assumptions and factors, including the availability of materials, services, equipment and personnel in a timely manner and on commercial terms acceptable to the Corporation, favorable weather conditions, the ability of the Corporation to obtain all required regulatory approvals in a timely manner and on satisfactory terms, the current business plan of the Corporation (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 Corporation's ability to economically produce oil and gas from its properties and the timing and costs of such production and the ability of the Corporation to generate internal cash flow.
  • Forward-looking statements concerning assumed average production for the 2012 fiscal year and assumed exit production as at June 30, 2012 are based upon various assumptions and factors including the Corporation's current production from its various properties, existing plans for the drilling and completion of wells for the balance of fiscal 2012, Compass' historical success rate with wells drilled on its properties and elsewhere 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 and others 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 Corporation'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 Corporation's interpretation of that data, the availability of materials, services, equipment and personnel in a timely manner and on commercial terms acceptable to the Corporation, favorable weather conditions (including access to well sites and leases), the ability of the Corporation to obtain all required regulatory approvals in a timely manner and on satisfactory terms, the ability of the Corporation to generate internal cash flow, and the availability of external financing on terms satisfactory to the Corporation.

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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