Emerge Oil & Gas Inc.
TSX : EME

Emerge Oil & Gas Inc.

August 15, 2011 03:00 ET

Emerge Announces Strong Second Quarter 2011 Results

CALGARY, ALBERTA--(Marketwire - Aug. 15, 2011) - Emerge Oil & Gas Inc. ("Emerge" or the "Company") (TSX:EME) is pleased to announce its second quarter operating and financial results for the three and six month periods ended June 30, 2011 ("Q2 2011" and "YTD 2011", respectively). Electronic copies of the Company's complete second quarter 2011 interim financial statements and management's discussion and analysis ("MD&A") have been filed under our profile on SEDAR at www.sedar.com and are available on our website at www.emergeoilandgas.com.

Emerge generated record funds flow from operations of $13.4 million or $0.14 per diluted share in Q2 2011 on improved operating netbacks. Strong oil prices, narrower heavy oil price differentials and Emerge's continued focus on operating cost control and improvements resulted in an operating netback of $34.02/boe before realized risk management contracts and $30.51/boe including realized risk management contracts (as compared to $21.68/boe and $22.18/boe, respectively, in Q1 2011). While stronger oil prices pushed Emerge's revenue up by 15% from Q1 2011, operating netbacks were significantly stronger, up 57% and 38% before and after realized risk management losses, respectively. The improvement in operating netbacks demonstrates that the capital investments and other cost control measures taken by the Company, net of world oil prices, are working as forecasted. Q2 2011 operating costs declined to $20.10/boe, a 16% reduction from $24.05/boe in Q1 2011 and a 26% reduction from $27.10/boe in Q4 2010.

Production during the quarter was impacted by downtime related to spring break-up conditions, as certain wellsites were inaccessible due to wet leases. Consequently, the Company was unable to truck sales oil out of some wells and was unable to perform service work on certain wells that required workovers. Most of these wells were serviced and re-started in July with production rates now returning to their pre-downtime levels. Emerge commenced its Q2 2011 drilling program in late May 2011 where we drilled 7 (6.7 net) wells during the quarter with 100% success. Two (2.0 net) of these wells were completed and on production by the end of the quarter with the remaining wells awaiting completion services.

The Company commenced its post spring break-up drilling program at its farm-in lands at Primate, following up the success of our Q1 2011 heavy oil pool discovery. The Company drilled 5 (5.0 net) wells for McLaren heavy oil during Q2 2011 and completed and equipped four of the five wells during June and July. These wells are currently on production at stabilized rates ranging between 80 and 120 bbls/d each of heavy oil, which is significantly above average for the Lloydminster area. This brings total production to 450 bbls/d from the Primate field resulting in on-stream capital efficiencies of approximately $8,000 per bbl/d. Emerge is adding to its land position in the area, and has earned 5 net sections at Primate through the farm-in. The Company has identified 7 additional drilling locations from existing seismic and 4 contingent drilling locations on its lands at Primate, and has recently shot additional 2D seismic data in the area.

Emerge also commenced its 5 horizontal well drilling commitment on our farm-in lands in the Kirkpatrick Lake area (near Coronation/Halkirk, Alberta) in Q2 2011, targeting Viking light oil. The Company pays 100% of the capital costs through to equipping to earn a 70% working interest in the lands. Initially delayed by wet field conditions, the Company drilled its first horizontal well in late June 2011 and has spud the fifth and final well this week. The Company is currently in the process of completing and fracturing the first three wells in the program. Drilling operations to-date have been executed as planned and within budget of approximately $1.2 million per well (drill and case). Emerge anticipates announcing well results in September 2011 once the wells have been tied-in and production rates have been established.

Emerge exited the quarter with an exit net debt to annualized funds flow from operations ratio of 1.2:1. The Company's exit net debt totalled $65.8 million, including $63.4 million drawn on the Company's available credit facilities of $75 million.

Q2 2011 Highlights:
Operations
  • Recorded production volumes of 5,768 boe/d (96% oil and NGLs), down 5% from Q1 2011 due to weather-related production downtime and up 29% from Q2 2010 reflecting the Company's ongoing successful low-risk development programs. In light of the Company's focus and budget reallocation toward its higher netback Viking light oil properties, Emerge is withdrawing its previous average production guidance for 2011, and will re-establish guidance following well results from the initial Viking farm-in commitment wells (expected in September 2011).
  • Drilled 7 (6.7 net) wells resulting in 6 (6.0 net) heavy oil wells and 1 (0.7 net) well cased for Viking light oil (100% success).
  • Reduced operating costs to $20.10/boe, a reduction of 16% from $24.05/boe in Q1 2011 and $23.96/boe in Q2 2010.
Commodity Prices
  • Realized an average oil and NGL price (excluding the effects of risk management contracts) of $74.72/bbl, up 21% from $61.86/bbl realized in Q1 2011 on higher average WTI oil prices and narrower heavy oil differentials. WTI Cdn$ improved 7% while the heavy oil differential (WCS heavy vs. WTI Cdn$ light) narrowed to -17% from -24% in Q1 2011.
  • On the back of a strong $82.13/bbl average WCS price, the Company realized a $1.8 million loss on risk management contracts ($3.51/boe). Emerge has 2,500 bbls/d of heavy oil production hedged for the remainder of the year pursuant to financial risk management contracts at the WCS index swap price of $75.44/bbl, providing predictability and stability to a portion of our cash flows thereby protecting our capital program. The current market value of our outstanding risk management contracts is approximately $7.2 million.
Financial
  • Generated revenue of $38.2 million (excluding realized risk management contracts), up 15% from $33.2 million in Q1 2011.
  • Generated funds flow from operations of $13.4 million ($0.14 per diluted share), up 42% from $9.4 million ($0.10 per basic and diluted share) in Q1 2011 on higher realized oil prices and lower cash costs.
  • Reported net earnings of $15.6 million ($0.17 per diluted share), which included a non-cash unrealized gain on risk management contracts of $13.4 million.
  • Realized an operating netback (including realized risk management contracts) of $30.51/boe and a funds flow netback of $25.52/boe. While our realized price per boe improved by 20% from Q1 2011, our operating netback (before risk management contracts) and funds flow netback improved by 57% and 48%, respectively over Q1 2011.
  • Exited the quarter with a ratio of net debt to annualized funds flow from operations of 1.2:1.
Capital Investment
  • Drilled 7 (6.7 net) wells at a 100% net success rate.
  • Incurred capital expenditures of $10.7 million including $5.5 million on drilling, completion and equipping activities, $2.8 million on facilities and $2.4 million on land, seismic and other.
  • Commissioned the Company's Silverdale oil battery and treating facility in early May 2011.
  • Commenced the 5-well drilling commitment pursuant to our farm-in agreement targeting Viking light oil in the Kirkpatrick Lake area of Alberta. The Company expects to fulfill its drilling commitment by the August 31, 2011 deadline.
HIGHLIGHTS: Q2 2011 Q2 2010 Q1 2011 YTD 2011 YTD 2010
Financial ($000s, except share, per share and per boe amounts)









Oil and natural gas revenue 38,224 24,423 33,193 71,417 49,260
Funds flow from operations (1) (4) 13,395 6,278 9,447 22,842 16,318
Per share
– basic ($)
0.15 0.08 0.10 0.25 0.20
Per share
– diluted ($)
0.14 0.08 0.10 0.24 0.20
Per boe ($) 25.52 15.46 17.23 21.29 20.95
Net earnings (loss) 15,605 (2,544 ) (10,346 ) 5,258 (516 )
Per share
– basic ($)
0.17 (0.03 ) (0.11 ) 0.06 (0.01 )
Per share
– diluted ($)
0.17 (0.03 ) (0.11 ) 0.06 (0.01 )
Weighted average shares outstanding
Basic 92,348,433 82,980,961 92,337,359 92,342,927 82,978,047
Diluted (5) 93,240,121 82,980,961 92,337,359 93,771,459 82,978,047
Capital expenditures 10,710 18,642 24,256 34,966 32,660
Ending net debt(2)(4) 65,787 32,056 68,589 65,787 32,056
Ending securities outstanding
Common shares 92,348,433 83,041,767 92,348,433 92,348,433 83,041,767
Stock options 8,209,000 6,929,000 8,214,000 8,209,000 6,929,000
Operating
Average daily production
Oil and NGLs (bbls/d) 5,556 4,404 5,887 5,720 4,242
Natural gas (mcf/d) 1,271 357 1,231 1,251 374
Combined (boe/d) 5,768 4,464 6,092 5,929 4,304
% Oil and NGLs 96 99 97 96 99 %
Average realized prices
Oil and NGLs ($/bbl) 74.72 60.65 61.86 68.14 63.75
Natural gas ($/mcf) 3.84 3.67 3.81 3.83 4.66
Combined ($/boe) 72.83 60.13 60.54 66.55 63.23
Operating netback ($/boe) (3) (4)
Realized price 72.83 60.13 60.54 66.55 63.23
Royalties (15.92 ) (12.56 ) (11.96 ) (13.90 ) (12.92 )
Operating expenses (20.10 ) (23.96 ) (24.05 ) (22.12 ) (21.85 )
Transportation expenses (2.79 ) (3.17 ) (2.85 ) (2.82 ) (3.00 )
Operating netback, before realized
risk management contracts
34.02 20.44 21.68 27.71 25.46
Realized risk management contracts (3.51 ) 0.50 (1.46 )
Operating netback 30.51 20.44 22.18 26.25 25.46
Number of gross (net) wells drilled
Oil 7 (6.7 ) 5 (5.0 ) 19 (18.4 ) 26 (25.1 ) 22 (22.0 )
Service 1 (1.0 ) 1 (1.0 )
D&A 1 (1.0 ) 1 (1.0 ) 1 (1.0 )
Total 7 (6.7 ) 5 (5.0 ) 21 (20.4 ) 28 (27.1 ) 23 (23.0 )
Net success rate (%) 100 100 95 96 96
(1) Funds flow from operations is a non-IFRS measure and is calculated as cash flow from operating activities before the change in non-cash working capital and decommissioning expenditures. Management uses funds flow from operations to analyze operating performance. Funds flow per share is calculated using the same number of weighted average basic and diluted shares used in calculating net earnings (lo) per share.
(2) Net debt is a non-IFRS measure and is calculated as bank debt plus the working capital deficiency excluding risk management contracts. Management uses net debt to assess liquidity and general financial strength.
(3) Operating netback is a non-IFRS measure and is calculated as sales revenue on a per boe basis, less royalties, operating and transportation expenses on a per boe basis. Management uses operating netback as an indicator of operating performance and profitability of its products relative to current commodity prices.
(4) Funds flow from operations, funds flow from operations per share, net debt and operating netback as presented do not have standardized meanings prescribed by IFRS and therefore the reader is cautioned that these non-IFRS measures may not be comparable with the calculation of similar measures used by other entities.
(5) The impact of outstanding stock options is not included in the calculation of diluted shares outstanding when a net loss is recorded, as the result would be anti-dilutive.

Operations Update and Outlook

Emerge is pleased with the operating cost reductions realized in Q2 2011 and the Company continues to focus on its goal of achieving operating costs of $18.00-$20.00 boe/d by year-end 2011. The capital investments in Q4 2010 and Q1 2011 on infrastructure development including the installation of 50 kilometres of natural gas and water flowlines has had a material impact on lowering our operating costs. Emerge also has owned and operated water disposal facilities in each of its operating areas which has also been a factor in reducing our operating costs.

To date in Q3 2011, Emerge has drilled 3 (3.0) net heavy oil wells in the Lloydminster area and 3 (2.1 net) Viking horizontal light oil wells, bringing the total to 4 out of 5 Viking farm-in horizontal wells drilled with the fifth and final commitment well being drilled at the time of press. Once the fifth commitment well is drilled, Emerge will have earned 3.5 net horizontal wells and 10 sections of land at a 70% working interest pursuant to the Viking farm-in. The Company has now drilled 34 (32.2 net) wells year-to-date including 5 (3.7 net) Viking horizontals, 27 (26.5 net) heavy oil wells, 1 (1.0 net) service well and 1 (1.0 net) D&A.

During Q3 2011, Emerge has drilled and cased 2 (2.0 net) successful heavy oil wells in the Lloydminster, Alberta area and 1 (1.0 net) successful heavy oil well in the Dulwich area, east of Emerge's core Silverdale oil property. The wells were drilled in early July and are awaiting drier lease conditions for completion and production operations. With wet weather affecting late July and early August drilling, Emerge is awaiting drier conditions to continue drilling in the Lloydminster area. Emerge plans to drill approximately 15 to 20 heavy oil wells in the Primate, Freemont and Silverdale/Furness areas for the remainder of 2011.

As noted above, Primate has become a focus of new development for Emerge. Following the Q1 2011 discovery well of 135 boe/d and a successful Q2 2011 step-out oil pool delineation phase, this area now has 5 wells producing approximately 450 boe/d oil. Emerge is currently acquiring additional mineral lands and has shot 52 kilometres of 2D seismic to further delineate the play. This area is highly prospective for new discoveries of multi-zone heavy oil opportunities and has quickly become a new core area for heavy oil production.

Emerge is well underway with the Viking horizontal light oil play having commenced drilling the first 2 of its 5 horizontal farm-in commitment wells in the Kirkpatrick Lake area in late June 2011, and continuing with the 3 remaining wells in Q3 2011. The fifth and final horizontal well is currently drilling to complete the initial commitment portion of the agreement. Drilling operations have gone smoothly with completion and fracturing operations occurring at the time of press. Each well was drilled with a horizontal section of 900 to 1,100 meters in length with liners. The horizontal section will then undergo a planned multi-stage warm water frac stimulation consisting of 18 to 20 stages, at 15 tonnes per stage. Emerge is planning to commence tie-in activities in late August 2011 with initial rates expected to be announced thereafter, once production rates have been established. The Viking light oil resource play is a rapidly emerging light oil resource play in East Central Alberta with prolific light oil wells with initial stabilized production rates in the 75 to 125 boe/d range and reserves in the 75-100 mboe range. Emerge has access to 34 sections of high working interest and operated prospective Viking land through a combination of owned and farm-in acreage.

Production volumes to date in Q3 2011 have been impacted by wet weather conditions in certain fields, where higher than normal rain has prevented the Company from servicing existing wells and from bringing recently drilled wells onto production. Completion, equipping and tie-in activities have been delayed in recent weeks on both our heavy and light oil drilling programs. Current oil sales are averaging between 5,400 and 5,600 boe/d, with 8 new drills to bring on production as soon as drier conditions permit. We anticipate these wells will be on production within the month of September, at which time Emerge plans on releasing revised production guidance for 2011 incorporating the Viking well rates.

The Company's plans for the remainder of 2011 include:

  • Complete our review of 52 kilometres of seismic data shot at Primate in Q3 2011.
  • Complete, fracture and tie-in 5 newly drilled Viking Horizontal wells in the Kirkpatrick Lake area in Q3 2011 and continue to develop our Coronation Viking light oil pool.
  • Drill 15 to 20 heavy oil wells in late Q3 2011 and Q4 2011 in the Primate, Freemont and Silverdale/Furness areas.
  • Continue our focus on operating cost control and reductions and work towards our goal of $18.00-$20.00 per boe by year-end 2011.
  • Continue to evaluate acquisition and land opportunities in all major core areas.

Emerge continues to add to its inventory of focused, large oil-in-place assets and expects to show production growth in the second half of 2011. Our heavy oil properties in greater Lloydminster and Primate along with our newly developed Viking light oil play in the Coronation and Kirkpatrick Lake areas give the Company an exciting oil drilling inventory to move forward and grow its production base.

About Emerge Oil & Gas Inc.

Emerge is engaged in the acquisition and exploration for and development and production of oil and natural gas in Western Canada. The Company currently operates within two principal areas, namely, the Lloydminster area of west-central Saskatchewan and east-central Alberta and the Battlebend/Coronation area of east-central Alberta. Emerge is headquartered in Calgary, Canada.

Reader Advisories:

IFRS

On January 1, 2011, Emerge adopted International Financial Reporting Standards ("IFRS"), and accordingly, Emerge has prepared its interim financial results for the three and six months ended June 30, 2011, including comparative 2010 results, in accordance with IFRS 1, "First-Time Adoption of International Financial Reporting Standards" and with International Accounting Standard 34, "Interim Financial Reporting", as issued by the International Accounting Standards Board. Previously, Emerge prepared its financial statements in accordance with the Canadian generally accepted accounting principles in effect prior to January 1, 2011 ("Previous GAAP"). Reconciliations from Previous GAAP to IFRS are presented in the notes to the Company's interim financial statements.

Barrel of Oil Equivalent

The Company may present petroleum and natural gas production and reserve volumes in barrel of oil equivalent ("boe") amounts. For purposes of computing such units, a conversion rate of 6,000 cubic feet of natural gas to one barrel of oil equivalent (6:1) is used. The conversion ratio of 6:1 is based on an energy equivalency conversion method which is primarily applicable at the burner tip and does not represent value equivalence at the wellhead. Readers are cautioned that boe figures may be misleading, particularly if used in isolation.

Forward-Looking Statements

This news release contains forward-looking 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" and similar expressions are intended to identify forward-looking statements or information. More particularly and without limitation, this news release contains forward-looking statements and information concerning: estimated drilling costs for the Kirkpatrick Lake Viking horizontal well drilling program; expected timeframe of announcing Viking well results from the recently drilled wells in the Kirkpatrick Lake area; expectations to fulfill the farm-in drilling commitment by the required deadline; the timing and extent of operating cost reductions; drilling plans for the remainder of the year including the number of wells and composition thereof; estimated timing of tie-in activities at Kirkpatrick Lake; production and reserve estimates for Viking light oil wells; expected timing of placing 8 newly drilled wells onto production; capital, operational and growth plans for the remainder of 2011; and the size and composition of Emerge's drilling inventory.

The forward-looking statements in this news release are based on certain key expectations and assumptions made by Emerge, including but not limited to expectations and assumptions concerning: the ability to close the asset divestiture in a timely fashion; prevailing and future commodity prices and foreign exchange rates; applicable royalty rates, tax rates and related laws and regulations; future production rates; the performance of existing and future wells; the success obtained in drilling new wells; the inventory of new drilling locations; the sufficiency of budgeted capital expenditures in carrying out planned activities; the availability and cost of labour and services, including but not limited to drilling and completion equipment and services; adequate weather and environmental conditions for drilling and completion activities, including the transportation of associated equipment; the receipt, in a timely manner, of regulatory and third party approvals; the timing of development and construction plans; and the ability of Emerge to secure adequate product processing and transportation and to market its crude oil and natural gas successfully.

Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties, certain of which are beyond the control of the Company. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to the risks associated with the oil and gas industry in general such as: operational risks in development, exploration and production; delays or changes in plans with respect to exploration and development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections relating to production rates, costs and expenses; health, safety and environmental risks; risks associated with adverse weather and the impact on drilling and completion activities and the transportation of associated equipment; fluctuations in foreign exchange rates and in commodity prices, and in particular in the price of heavy oil; transportation and marketing of crude oil and natural gas and the loss of markets; the impact of competitors; the ability to access sufficient capital from internal and external sources; failure to obtain required regulatory and other third party approvals; unanticipated fluctuations or declines in production; and changes in legislation, including but not limited to tax laws, royalty rates and environmental regulations. Readers are cautioned that the foregoing list of risk factors is not exhaustive. Additional information on these and other factors that could impact Emerge can be found in Emerge's Annual Information Form for the year ended December 31, 2010 which may be accessed through Emerge's SEDAR profile at www.sedar.com.

The forward-looking statements and information contained in this news release are made as of the date hereof and Emerge undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.

Contact Information