Cub Energy Inc.
TSX VENTURE : KUB

Cub Energy Inc.

March 18, 2015 19:30 ET

Cub Energy Inc. Announces 2014 Year-End Financial and Operational Results

HOUSTON, TEXAS--(Marketwired - March 18, 2015) - Cub Energy Inc. ("Cub" or the "Company") (TSX VENTURE:KUB), a Black Sea region-focused upstream oil and gas company, announced today its audited annual financial and operating results for the year ended December 31, 2014. All dollar amounts are expressed in United States Dollars. This update includes results from KUB-Gas LLC ("KUB-Gas"), which Cub has a 30% ownership interest, and Tysagaz LLC ("Tysagaz"), Cub's 100% owned subsidiary.

Operational Highlights

  • Production averaged 1,995 boe/d (98% natural gas) for the year ended December 31, 2014, representing a 29% increase from 1,542 boe/d in 2013.

  • Exit rate of 2,407 boe/d at December 31, 2014 for a 16% increase over the 2013 exit rate of 2,070 boe/d.

  • Current production of approximately 1,524 boe/d, which has been negatively affected by the suspension of drilling activities and reinvestment at KUB-Gas during the last twelve months and also from recent government decrees that encourages producers to constrain production due to reduced netbacks.

  • Achieved average natural gas price of $9.70/thousand cubic feet ("Mcf") and condensate price of $78.19/bbl for the year ended December 31, 2014 compared to $11.26/Mcf and $87.90/bbl for 2013.

  • On March 14, 2014, the RK-21 well at Tysagaz (100% WI) was spud and subsequently tested gas at a maximum rate flow rate of 2.6 million cubic feet per day ("MMcf/d") through a 12-millimetre choke. The well was tied-in and placed on production on June 2, 2014.

  • On October 14, 2014, the RK-23 well (100% WI) was spud and subsequently tested gas in the shallow L Sands at a rate of over 2.3 MMcf/d through an eight millimetre choke. The well produced an average of 2.1 MMcf/d during December 2014.

  • In January 2015, the company added the fourth, fifth and sixth sets of perforations to the RK-21 well (100% WI). The well responded favorably by displaying an immediate increase in flowing tubing pressure with a corresponding increase of production from a five day average of 0.8 MMcf/d to over 2.6 MMcf/d for the subsequent five day period. These perforations were added over a two-day period at small incremental cost.

  • The M-17 well (30% WI) was spud in November 2013 and reached TD in March 2014. Logs indicated 9 metres of net pay in the primary target, the S6 sand, and 2.5 metres of pay in the S5 and 5.5 metres in the deeper S7. They also indicated resource potential 22 metres in the R30c. On test, the S7 achieved a rate of 0.9 MMcf/d, exceeding the Company's expectations that it would require stimulation to produce at a commercial rate. A bridge plug was set above the S7, and after testing, and the S6 commenced production on June 26, 2014 at an initial rate of 6.0 MMcf/d (1.8 MMcf/d net to Cub). That rate has been increased several times, allowing the well to stabilize at each stage, and averaged over 11.0 MMcf/d (3.3 MMcf/d net to Cub) during 2014. The S5 and R30c remain behind pipe to be tested and developed at a later date.

  • M-22 (30% WI) well reached TD in late December, and logs and drilling data indicate 18 metres of net pay in two zones. The well also encountered four other zones with aggregate thickness of 22 metres that have resource potential. The well has been cased and completion and testing is ongoing. A flowline was pre-built earlier in 2014.

Financial Highlights

  • Netback of $30.38/Boe or $5.06/Mcfe for the year ended December 31, 2014 which decreased as a result of the increase in royalty rates from 28% to 55% which went into effect August 1, 2014 as well as lower gas prices in 2014, as compared to a netback of $41.02/boe or $6.84/Mcfe for 2013.

  • Revenue from hydrocarbon sales for the year ended December 31, 2014, increased 112% to $7.0 million (2013 - $3.3 million) which was driven by the RK-21 and RK-23 wells.

  • Revenue from hydrocarbon sales by KUB-Gas for the year ended December 31, 2014 were $119.3 million (2013 - $117.8 million) of which the Company's 30% share was $35.8 million (2013 - $35.3 million).

  • The total pro-rata revenue from hydrocarbon sales, a non-IFRS measure combining the Company's revenue and 30% of the allocated KUB-Gas revenue, totaled $42.8 million (2013 - $38.6 million) for the year ended December 31, 2014.

  • The Company received $7.6 million in dividends during the year ended December 31, 2014 as compared to $9.8 million during 2013. The Company did not receive any dividends during the fourth quarter of 2014 as a result of National Bank of Ukraine resolution prohibiting the payment of cross-border dividends but did record a dividend receivable of $1.2 million at December 31, 2014, which was receipted in early 2015.

  • The Company's net income from its 30% equity investment in KUB-Gas for the year ended December 31, 2014 was $6.5 million (2013 - $11.2 million) which was impacted by lower gas prices, increased royalty rates (from 28% to 55%), an impairment charge of $1.7 million and a $2.0 million foreign exchange loss of on a foreign denominated loan (EBRD) from the Ukrainian currency devaluation.

  • The net loss for the year ended December 31, 2014 was $23.5 million or $0.08 per share (2013 - $3.0 million or $0.01 per share) which was impacted by a $22.3 million (2013 - $5.2 million) impairment charge on exploration and evaluation assets and $3.0 million (2013 - $Nil) impairment charge on property, plant and equipment.

  • Capital expenditures of $7.4 million (2013 - $8.9 million) for the year ended December 31, 2014 and the pro-rata capital expenditures, a non-IFRS measure combining the Company's capital expenditures and 30% of the allocated KUB-Gas capital expenditures, totaled $12.9 million (2013 - $17.9 million) for the year ended December 31, 2014.

  • The Company has $3.0 million available on a $5.0 million unsecured line of credit with Pelicourt as at December 31, 2014. Pelicourt notified the Company that it is having liquidity issues as a result of the National Bank of Ukraine resolution prohibiting the payment of cross-border dividends and will not be able to provide any further funding under the line of credit in 2015.

  • With the current cash resources and the uncertainty surrounding the Pelicourt line of credit, dividend restrictions, currency fluctuations, reliance on a single customer, and impact on carrying values, the Company may not have sufficient cash to continue the exploration and development activities. These matters raise significant doubt about the ability of the Company to continue as a going concern and meet its obligations as they become due.




(in thousands of US Dollars)
Three
Months
Ended
December 31, 2014
Three
Months
Ended
December 31, 2013
Year
Ended
December 31, 2014
Year
Ended
December 31, 2013
Petroleum and natural gas revenue 2,154 745 6,992 3,250
Pro-rata petroleum and natural gas revenue(1) 11,271 9,761 42,790 38,575
Net profit (loss) (5,345 ) (5,304 ) (23,467 ) (3,013 )
Earnings (loss) per share - basic and diluted (0.02 ) (0.02 ) (0.08 ) (0.01 )
Funds generated from operations(2) (930 ) 857 4,319 2,474
Pro-rata funds generated from operations(3) 1,454 2,111 12,551 9,814
Capital expenditures(4) 1,211 2,789 7,420 8,851
Pro-rata capital expenditures(4) 2,484 4,900 12,917 17,861
Pro-rata netback ($/boe) 21.47 40.15 30.38 41.02
Pro-rata netback ($Mcfe) 3.58 6.69 5.06 6.84
December 31,
2014
December 31,
2013
Working capital 704 942
Cash and cash equivalents 1,728 1,617
Long-term debt 2,000 -

Notes:

  1. Pro-rata petroleum and natural gas revenue is a non-IFRS measure that adds the Company's petroleum and natural gas revenue earned in the respective periods to the Company's 30% equity share of the KUB-Gas petroleum and natural gas sales that the Company has an economic interest in.
  2. Funds from operations is a non-IFRS measure and is defined as cash flow from operating activities, excluding changes in non-cash working capital.
  3. Pro-rata funds from operations is a non-IFRS measure that adds the Company's funds from operations in the respective periods to the Company's 30% equity share of the KUB-Gas funds from operations that the Company has an economic interest in.
  4. Capital expenditures includes the purchase of property, plant and equipment and the purchase of exploration and evaluation assets. Pro-rata capital expenditures is a non-IFRS measure that adds the Company's capital expenditures in the respective periods to the Company's 30% equity share of the KUB-Gas capital expenditures that the Company has an economic interest in.

Outlook

The Company is re-evaluating its future capital programs on its 100% owned and operated Tysagaz assets in light of the recent changes in royalty rates and the temporary cross-border dividend restriction. On March 3, 2015, the Ukraine Parliament passed laws, reinstating the reduced royalty rate of 30.25% for newly drilled wells (for two years), and extending the cross-border dividend freeze through June 3, 2015. If financing becomes available or government policy changes, the Company may perform several workovers at Tysagaz in late 2015. The Company needs to reinvest capital in its operations to sustain or increase current production levels.

On October 22, 2014, field operations re-commenced at KUB-Gas with the spudding of the M-22 well. The primary target in M-22 is the S6 zone in the Serpukhovian. The well reached its total depth of 3,629 metres in early 2015 and has encountered gas in six zones. The well is currently awaiting testing. The Company and its partner are discussing further drilling opportunities, but will be dependent on government policy changes and discussions and approval of the partners.

Supporting Documents

Cub's complete quarterly reporting package, including the audited interim financial statements and associated Management's Discussion and Analysis, have been filed on SEDAR (www.sedar.com) and has been posted on the Company's website at www.cubenergyinc.com.

Cautionary Statement

Test results are not necessarily indicative of long-term performance or of ultimate recovery. The test data contained herein is considered preliminary until full pressure transient analysis is complete

About Cub Energy Inc.

Cub Energy Inc. (TSX VENTURE:KUB) is an upstream oil and gas company, with a proven track record of exploration and production cost efficiency in the Black Sea region. The Company's strategy is to implement western technology and capital, combined with local expertise and ownership, to increase value in its undeveloped land base, creating and further building a portfolio of producing oil and gas assets within a high pricing environment.

Oil and Gas Equivalents

A barrel of oil equivalent ("boe") or units of natural gas equivalents ("Mcfe") is calculated using the conversion factor of 6 Mcf (thousand cubic feet) of natural gas being equivalent to one barrel of oil. A boe conversion ratio of 6 Mcf: 1 bbl (barrel) or a Mcfe conversion of 1bbl: 6 Mcf is, based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead and is not based on either energy content or current prices. While the boe ratio is useful for comparative measures, it does not accurately reflect individual product values and might be misleading, particularly if used in isolation. As well, given that the value ratio, based on the current price of crude oil to natural gas, is significantly different from the 6:1 energy equivalency ratio, using a 6:1 conversion ratio may be misleading as an indication of value.

Reader Advisory

Except for statements of historical fact, this news release contains certain "forward-looking information" within the meaning of applicable securities law. Forward-looking information is frequently characterized by words such as "plan", "expect", "project", "intend", "believe", "anticipate", "estimate" and other similar words, or statements that certain events or conditions "may" or "will" occur. Cub believes that the expectations reflected in the forward-looking information are reasonable; however there can be no assurance those expectations will prove to be correct. We cannot guarantee future results, performance or achievements. Consequently, there is no representation that the actual results achieved will be the same, in whole or in part, as those set out in the forward-looking information.

Forward-looking information is based on the opinions and estimates of management at the date the statements are made, and are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those anticipated in the forward-looking information. Some of the risks and other factors that could cause the results to differ materially from those expressed in the forward-looking information include, but are not limited to: general economic conditions in Ukraine, the Black Sea Region and globally; political unrest and security concerns in Ukraine; industry conditions, including fluctuations in the prices of natural gas and foreign currency; governmental regulation of the natural gas industry, including environmental regulation; unanticipated operating events or performance which can reduce production or cause production to be shut in or delayed; failure to obtain industry partner and other third party consents and approvals, if and when required; competition for and/or inability to retain drilling rigs and other services; the availability of capital on acceptable terms; the need to obtain required approvals from regulatory authorities; stock market volatility; volatility in market prices for natural gas; liabilities inherent in natural gas operations; competition for, among other things, capital, acquisitions of reserves, undeveloped lands, skilled personnel and supplies; incorrect assessments of the value of acquisitions; geological, technical, drilling, processing and transportation problems; changes in tax laws and incentive programs relating to the natural gas industry; failure to realize the anticipated benefits of acquisitions and dispositions; and the other factors. Readers are cautioned that this list of risk factors should not be construed as exhaustive.

This cautionary statement expressly qualifies the forward-looking information contained in this news release. We undertake no duty to update any of the forward-looking information to conform such information to actual results or to changes in our expectations except as otherwise required by applicable securities legislation. Readers are cautioned not to place undue reliance on forward-looking information.

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