Emerge Oil & Gas Inc.
TSX : EME

Emerge Oil & Gas Inc.

November 09, 2011 18:35 ET

Emerge Announces Third Quarter 2011 Results

CALGARY, ALBERTA--(Marketwire - Nov. 9, 2011) - Emerge Oil & Gas Inc. ("Emerge" or the "Company") (TSX:EME) is pleased to announce its third quarter operating and financial results for the three and nine month periods ended September 30, 2011 ("Q3 2011" and "YTD 2011", respectively). Electronic copies of the Company's complete third 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.

Highlights:

  • Production averaged 5,479 boe/d in Q3 2011, up 10% from 4,993 boe/d in Q3 2010. Q3 2011 production was down 5% from Q2 2011 due to minimal new wells brought onto production which were offset by natural declines. Current production has increased to an average of 5,800 boe/d to-date in Q4 2011 reflecting recent heavy oil drilling success.
  • Operating expenses decreased for the third consecutive quarter, to $19.82/boe in Q3 2011 (and down from $24.69/boe in Q3 2010), despite a lower production base and higher property tax costs. Operating cost reductions are attributed to a full quarter of field efficiencies and cost savings realized by infrastructure investments in core areas from Q4 2010 to Q2 2011, which have reduced water and emulsion trucking, water disposal, fuel and other costs.
  • Transportation expenses decreased to $2.35/boe (from $2.95/boe in Q3 2010 and $2.79/boe in Q2 2011) due to reduced clean oil trucking costs. Lower clean oil trucking costs are attributed to a full quarter of efficiencies and cost savings from the expanded Silverdale oil battery (commissioned in mid-Q2 2011) which is both sales-pipelined connected and centrally located to Emerge's operations thereby minimizing trucking distances.
  • Despite a 12% decline in oil price (at WTI Cdn$) in Q3 2011 from Q2 2011, Emerge posted a strong Q3 2011 operating netback of $28.50/boe inclusive of realized risk management which was only 7% lower than its Q2 2011 netback of $30.51/boe. Our operating netbacks in Q3 2011 of $26.29/boe excluding risk management and $28.50/boe including risk management were higher by 35% and 46%, respectively, from those realized in Q3 2010.
  • Funds flow from operations totalled $11.7 million in Q3 2011 ($0.13 per basic and diluted share, or $23.19/boe), up 70% from $6.9 million generated in Q3 2010 ($0.08 per basic and diluted share, or $14.99/boe).
  • On September 30, 2011, the Company closed the sale of its Silverdale 2-6 oil battery and emulsion processing facility to an arm's length energy services company, for cash proceeds of $18.0 million which were used to reduce bank debt. Emerge recognized a gain on the disposition of $4.9 million.
  • The Company's net debt (combined bank debt and working capital deficiency excluding risk management contracts) was $55.7 million at September 30, 2011, representing a 15% reduction from $65.8 million at the previous quarter ended June 30, 2011. Bank debt was $48.5 million against available credit facilities of $75.0 million.
  • The Company drilled 10 (8.8 net) wells in Q3 2011 with a 100% net success rate, and has drilled 38 (35.9 net) wells in YTD 2011. Drilling operations during Q3 2011 included 4 (2.8 net) wells at Kirkpatrick Lake targeting Viking light oil, and 3 (3.0 net) wells at Primate and 3 (3.0 net) wells at Greater Lloydminster targeting multi-zone heavy oil.
  • Exploration and development expenditures totalled $19.7 million in Q3 2011 and included the completion and equipping of certain wells drilled in Q2 2011 which had been delayed due to wet field conditions. Capital expenditures were comprised of: $15.1 million (76%) on light and heavy oil drilling activities; $2.3 million (12%) on land acquisition and seismic programs; and $2.3 million (12%) on facilities, recompletions and other.
  • The Company participated at Crown land sales purchasing nearly 10,000 net acres of undeveloped land for $1.4 million to further enhance our drilling inventory.
  • Emerge completed its semi-annual borrowing base review with its lenders during Q3 2011 and incorporating the above mentioned asset sale. The lenders reaffirmed the Company's borrowing base at $75.0 million (unchanged) until the annual review scheduled for February 2012. The Company's net debt to trailing quarter's annualized funds flow from operations ratio was 1.2:1 at September 30, 2011.
  • To date in Q4 2011, Emerge has drilled 8 (8.0 net) heavy oil wells at Primate and Freemont, has tied-in and recently placed onto production its fourth Viking farm-in well (0.7 net) and is developing the completion program for its fifth Viking farm-in well (0.7 net). Emerge is planning to drill 12 (12.0 net) total wells in Q4 2011, and is also actively acquiring seismic and planning its 2012 capital program.
HIGHLIGHTS: Q3 2011 Q3 2010 Q2 2011 YTD 2011 YTD 2010
Financial ($000s, except share, per share
and per boe amounts)
Oil and natural gas revenue 31,803 27,047 38,224 103,220 76,307
Funds flow from operations (1) (4) 11,691 6,886 13,395 34,533 23,205
Per share – basic ($) 0.13 0.08 0.15 0.37 0.28
Per share – diluted ($) 0.13 0.08 0.14 0.37 0.28
Per boe ($) 23.19 14.99 25.52 21.89 18.74
Net earnings (loss) 9,574 (2,765 ) 15,605 14,832 (3,281 )
Per share – basic ($) 0.10 (0.03 ) 0.17 0.16 (0.04 )
Per share – diluted ($) 0.10 (0.03 ) 0.17 0.16 (0.04 )
Weighted average shares outstanding
Basic 92,361,476 83,070,245 92,348,433 92,349,178 83,009,117
Diluted (5) 92,361,476 83,070,245 93,240,121 93,699,663 83,009,117
Exploration and development expenditures 19,680 27,822 10,710 54,646 50,628
Net acquisitions (dispositions) (18,000 ) (18,000 ) 9,855
Net capital expenditures 1,680 27,822 10,710 36,646 60,483
Ending net debt (2) (4) 55,729 52,949 65,787 55,729 52,949
Ending securities outstanding
Common shares 92,368,433 83,076,767 92,348,433 92,368,433 83,076,767
Stock options 7,919,000 7,409,000 8,209,000 7,919,000 7,409,000
Operating
Average daily production
Oil and NGLs (bbls/d) 5,256 4,839 5,556 5,563 4,443
Natural gas (mcf/d) 1,340 923 1,271 1,281 559
Combined (boe/d) 5,479 4,993 5,768 5,777 4,536
% Oil and NGLs 96 % 97 % 96 % 96 % 98 %
Average realized prices
Oil and NGLs ($/bbl) 64.80 60.05 74.72 67.08 62.39
Natural gas ($/mcf) 3.79 3.68 3.84 3.81 4.12
Combined ($/boe) 63.09 58.88 72.83 65.44 61.62

Operating (continued)
Operating netback ($/boe) (3) (4)
Realized price 63.09 58.88 72.83 61.62
Royalties (14.63 ) (11.74 ) (15.92 ) (12.48 )
Operating expenses (19.82 ) (24.69 ) (20.10 ) (22.90 )
Transportation expenses (2.35 ) (2.95 ) (2.79 ) (2.98 )
Operating netback, before realized
risk management contracts
26.29 19.50 34.02 23.26
Realized risk management contracts 2.21 (3.51 )
Operating netback 28.50 19.50 30.51 23.26
Number of gross (net) wells drilled 10 (8.8 ) 24 (24.0 ) 7 (6.7 ) 47 (47.0 )
Net success rate 100 % 100 % 100 % 98 %

(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 (loss) 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) Nil shares were added to the basic number of weighted average shares outstanding in the periods Q3 2011, Q3 2010 and YTD 2010 for the potential dilution of the Company's stock options outstanding, as the result of the calculations was anti-dilutive in those periods.

Operations Update and Outlook

Emerge closed the sale of its Silverdale oil and emulsion processing facility in Q3 2011 which resulted in several benefits to Emerge both operationally and financially. Operationally, Emerge continues to maintain priority access to the facility for its emulsion processing and oil terminalling needs on a fee-for-service basis, which is not anticipated to result in a material change to our go forward operating costs from those incurred in Q3 2011. The facility is centrally located to Emerge's operations thereby minimizing intra-field trucking, and the Company maintains access and fixed processing fees for a period of seven years. Financially, Emerge received cash proceeds of $18.0 million on the sale which were used to reduce bank debt to $48.5 million and total net debt to $55.7 million at quarter-end, representing a 15% decrease from June 30, 2011 net debt. Emerge also realized a gain on the disposition of $4.9 million, which is reflected in Q3 2011 net earnings of $10.6 million. The added financial flexibility achieved through the asset sale allows the Company to comfortably execute the remainder of its 2011 capital program and develop its 2012 capital budget.

The Company's Q4 2011 drilling program is well underway with 8 (8.0 net) wells drilled to-date in the quarter of a total 12 (12.0 net) planned. This will bring our total to 50 (47.9 net) wells drilled in 2011. Emerge's recent drilling activity has been focused at its Primate field where production results have exceeded management's expectations for vertical heavy oil wells in the area. The Company has acquired additional offsetting acreage in recent months and is actively acquiring seismic to increase its drilling inventory at Primate. Emerge has also been active at its Freemont property where 2 (2.0 net) wells have recently been drilled with 100% success and are awaiting production equipment.

Emerge is pleased with the reductions in operating and transportation costs we have achieved to-date in 2011, and the Company continues to look for ways to improve operating efficiencies and controllable costs.

Emerge anticipates exploration and development expenditures to total $68-$70 million in 2011, which is within our capital budget set at the beginning of the year of $75 million, resulting in year-end net debt of $58-$60 million. Based on current estimates, Emerge expects 2011 production to average 5,700-5,800 boe/d, which represents a 17% increase (using the midpoint) from 2010 average production of 4,922 boe/d. Emerge is currently reviewing its portfolio of opportunities in conjunction with developing its 2012 capital budget which we expect to finalize by year-end. At this time, Emerge anticipates its 2012 capital budget will approximate its expected cash flows to preserve the Company's financial flexibility moving forward. Emerge has a multi-year drilling inventory of highly economic opportunities which are expected to generate continued growth in production, cash flows and project development in 2012.

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:

BOE Conversion:

Emerge 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.

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 nine months ended September 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.

Forward-Looking Statements and Information:

This news release contains forward-looking statements and forward-looking information 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: drilling plans for the remainder of 2011 including the number of wells and composition thereof; expected amount of exploration and development expenditures for 2011; expected ending net debt for 2011; average 2011 production rates; the expecting timing of completion of the Company's 2012 capital budget; and the anticipated level of expenditures and composition of the Company's 2012 capital budget.

The forward-looking statements and information in this news release are based on certain key expectations and assumptions made by Emerge, including but not limited to expectations and assumptions concerning: 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; the ability of Emerge to secure adequate product processing and transportation and to market its crude oil and natural gas successfully; and the ability of Emerge to secure adequate funding from internal and external sources for its operating and capital requirements..

Since forward-looking statements and information 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; 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.

This news release also contains future-oriented financial information and financial outlook information (collectively, "FOFI") about prospective and potential operating and financial results of Emerge in 2011, all of which are subject to the same assumptions, risk factors and qualifications as set forth in the paragraphs above. The FOFI contained in this news release was made as of the date of this news release and was provided for the purpose of giving a general overview of management's expectations regarding the anticipated results of Emerge's 2011 operations and capital expenditures. Readers are cautioned that the FOFI contained in this news release should not be used for purposes other than for which it is disclosed herein as such information may not be appropriate for other purposes.

The forward-looking statements and information and FOFI 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 or FOFI, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.

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