Emerge Oil & Gas Inc.
TSX : EME

March 23, 2011 17:30 ET

Emerge Reports 2010 Year End and Fourth Quarter Financial and Operating Results

CALGARY, ALBERTA--(Marketwire - March 23, 2011) - Emerge Oil & Gas Inc. ("Emerge" or the "Company") (TSX:EME) is pleased to report its financial and operating results for the three months and year ended December 31, 2010 ("Q4 2010" and "2010", respectively), with comparative results for the three months and year ended December 31, 2009 ("Q4 2009" and "2009", respectively). Today Emerge filed its audited financial statements, management's discussion and analysis and Annual Information Form for the year ended December 31, 2010 with SEDAR. These documents will be accessible shortly under Emerge's profile at www.sedar.com, and can be accessed immediately at the Company's website at www.emergeoilandgas.com.

FINANCIAL HIGHLIGHTS   
    Q4   Q4   Year ended December 31 ,
($000, except share and per share amounts) 2010   2009   2010   2009  
Petroleum and natural gas revenues 33,669   13,415   109,976   24,870  
Funds flow from operations (1) 6,698   2,363   30,762   4,966  
  Per share (basic and diluted) ($) (2) 0.07   0.04   0.36   0.11  
Cash flow from operating activities 3,166   1,178   28,363   2,498  
Net loss (11,938 ) (4,189 ) (26,658 ) (6,475 )
  Per share (basic and diluted) ($) (2) (0.13 ) (0.08 ) (0.31 ) (0.14 )
Capital expenditures                
  Exploration and development 36,262   12,018   87,812   26,654  
  Acquisitions (net of dispositions)   79,125   9,792   103,133  
  Net capital expenditures – cash 36,262   91,143   97,604   129,787  
  Non-cash capitalized items (1,628 ) 9,848   1,436   10,275  
  Total capital expenditures – net 34,634   100,991   99,040   140,062  
Weighted average common shares outstanding                
  Basic and diluted (2) 90,916,216   56,056,622   85,002,139   45,318,730  
             
          As at December 31 ,
          2010   2009  
Bank debt         37,409   10,255  
Working capital deficiency (excluding fair value of derivative instruments)   16,119   5,171  
Net debt (3)         53,528   15,426  
Total assets         198,855   141,147  
Securities outstanding                
  Common shares (4)         92,305,100   82,975,100  
  Stock options         7,962,333   3,910,000  
  Fully diluted securities outstanding         100,267,433   86,885,100  
                   
 OPERATING HIGHLIGHTS            
    Q4   Q4   Year ended December 31 ,
(units as noted) 2010   2009   2010   2009  
Average daily sales volumes                
  Oil (bbls/d) 5,869   2,208   4,794   1,003  
  NGLs (bbls/d) 11   24   11   22  
  Oil and NGLs (bbls/d) 5,880   2,232   4,805   1,025  
  Natural gas (mcf/d) 1,121   1,250   701   1,312  
  Combined (boe/d) 6,067   2,440   4,922   1,244  
  % oil and NGLs 97 % 91 % 98 % 82 %
Average realized prices                
  Oil ($/bbl) 61.57   62.90   62.17   62.04  
  NGLs ($/bbl) 55.75   51.84   48.77   50.05  
  Oil and NGLs ($/bbl) 61.56   62.78   62.14   61.78  
  Natural gas ($/mcf) 3.52   4.56   3.87   3.66  
  Combined ($/boe) 60.32   59.75   61.21   54.78  
Netbacks ($/boe) (5)                
  Petroleum and natural gas revenues 60.32   59.75   61.21   54.78  
  Royalties (11.84 ) (13.26 ) (12.28 ) (10.94 )
  Operating expenses (27.11 ) (25.60 ) (24.34 ) (23.60 )
  Transportation expenses (2.75 ) (3.99 ) (2.91 ) (3.31 )
  Operating netback 18.62   16.90   21.68   16.93  
  Other income 0.01   0.39   0.13   0.79  
  General and administrative expenses (6.13 ) (6.48 ) (4.22 ) (6.64 )
  Interest expense (0.50 ) (0.29 ) (0.48 ) (0.14 )
  Funds flow netback 12.00   10.52   17.11   10.94  
Drilling – gross (net) wells                
  Oil 18 (18.0 ) 14 (14.0 ) 64 (64.0 ) 18 (18.0 )
  Natural gas       1 (0.1 )
  Service 1 (1.0 )   1 (1.0 )  
  D&A     1 (1.0 )  
  Total 19 (19.0 ) 14 (14.0 ) 66 (66.0 ) 19 (18.1 )

Notes:

  1. Management uses "funds flow from operations" to analyze operating performance and liquidity. Funds flow from operations as presented does not have any standardized meaning prescribed by Canadian generally accepted accounting principles ("GAAP") and therefore it may not be comparable with the calculation of similar measures for other entities. Funds flow from operations is calculated as cash flow from operating activities (in accordance with GAAP) before the change in non-cash operating working capital and asset retirement expenditures. Funds flow from operations should not be viewed as an alternative to, or more meaningful than cash flows from operating activities in accordance with GAAP.
  2. All per share amounts are calculated using the number of weighted average basic and diluted shares in calculating net loss per share. Due to the anti-dilutive effect of Emerge's net loss for all periods presented, the diluted number of shares is equivalent to the basic number of common shares. In accordance with accounting guidelines, the weighted average number of special warrants, which were outstanding at December 31, 2009 and subsequently converted on January 21, 2010 to common shares, have been combined with the weighted average number of common shares.
  3. Management uses "net debt" to assess liquidity and general financial strength. Net debt as presented does not have any standardized meaning prescribed by GAAP and therefore may not be comparable with the calculation of similar measures for other entities. Net debt is calculated as bank debt plus other current liabilities less current assets, excluding the fair value of commodity price contracts. Net debt should not be viewed as an alternative to, or more meaningful than current assets or current liabilities as determined in accordance with GAAP.
  4. Common shares have been presented combined with the Company's special warrants which were outstanding at December 31, 2009 and subsequently converted to common shares on January 21, 2010.
  5. Management uses "operating netback" and "funds flow netback" as indicators of operating performance and profitability relative to current commodity prices, calculated on a per boe basis. Netbacks as presented do not have any standardized meaning prescribed by GAAP and therefore may not be comparable with the calculation of similar measures for other entities. Operating netback is calculated as average realized sales price less royalties, operating expenses and transportation expenses. Funds flow netback is calculated as operating netback plus other income, less general and administrative expenses and interest expense. There is no GAAP measure that is reasonably comparable to netbacks.

REPORT TO SHAREHOLDERS

Emerge is pleased to announce to shareholders its financial and operating results for the year ended December 31, 2010. 2010 marked Emerge's first year as a public company and first full year of operations and development on its asset base assembled in 2009. Through its two strategic acquisitions completed in 2009, Emerge established two core areas: the Lloydminster heavy oil area of Saskatchewan and Alberta, and the Battlebend medium oil area of Alberta. Emerge has truly 'emerged' from its 100 boe/d beginnings in 2008 to a focused production base in excess of 6,000 boe/d today.

Year-end 2010 results reflect the achievement of increases in funds flow per share, reserves per share and production per share from year-end 2009, which are the Company's overriding business objectives. Insiders of Emerge own 10% of the Company's outstanding common shares ensuring the alignment of interests with all shareholders.

In Q1 2010, Emerge drilled 17 (17.0 net) heavy oil wells in the Lloydminster area with 100% success. Emerge also drilled 1 (1.0 net) exploration well in a non-core area which was dry and abandoned. Emerge performed 35 reactivations of standing wells, which typically add production at a cost of less than $10,000 boe/d. Buoyed by strong commodity prices and new production in lower-cost areas, Emerge reported funds flow from operations in Q1 2010 of $10.3 million or $0.12 per share, and grew average sales to 4,143 boe/d.

In Q2 2010, a prolonged spring break-up delayed the Company's drilling program until mid-June. The Company drilled only 5 (5.0 net) wells, again at a 100% success rate. During the downtime, Emerge negotiated and closed an asset acquisition which expanded its heavy oil land base. The acquisition, which closed on June 18, 2010, included 400 boe/d of production, undeveloped land, and both drilling and standing well reactivation opportunities at an acquisition price of $9.9 million or approximately $24,750 per producing boe/d. The Company saw further production gains in Q2 2010, with sales averaging 4,464 boe/d, and the Company's credit facilities were increased to $52.5 million from $37.5 million as a result of the bank's annual review. Funds flow from operations in Q2 2010 totalled $6.4 million or $0.08 per share reflecting lower realized heavy oil prices and higher operating costs largely related to wet weather.

In Q3 2010, Emerge executed a farm-in agreement allowing Emerge to earn interests in up to 38.5 net sections of undeveloped land in the greater Lloydminster area. The agreement entitles Emerge to earn 100% of the farmor's interest in the lands in exchange for a non-convertible overriding royalty. Emerge also contracted a second drilling rig and saw the drilling of 24 (24.0 net) wells with 100% success, and the Company reactivated a further 52 standing oil wells. Sales volumes grew to 4,993 boe/d, and the Company's credit facilities were further increased to $60.0 million from $52.5 million as a result of the bank's semi-annual review. Q3 2010 also saw the widening of heavy oil price differentials, due in large part to transportation constraints resulting from third-party pipeline disruptions, which temporarily curtailed shipments of Canadian crude to U.S. markets. Funds flow from operations totalled $7.3 million or $0.09 per share in Q3 2010.

In Q4 2010, Emerge recorded its 7th consecutive quarter of average sales growth, to 6,067 boe/d. Emerge also closed a $30 million equity financing in October 2010 which allowed the Company to strengthen its balance sheet and expand its capital programs on its base assets and on the new assets acquired in Q2 2010. Emerge's expanded capital program included continued drilling and well reactivation activity, as well as pipeline and facility projects designed to handle greater volumes of produced fluids. Emerge drilled 19 (19.0 net) wells with 100% success and performed 40 well reactivations/recompletions. Capital expenditures totalled $36 million, while funds flow from operations totalled $6.7 million or $0.07 per share. Q4 2010 funds flow from operations was negatively impacted by a continued widening of the heavy oil differential early in the quarter coupled with higher trucking expenses and annual G&A expense provisions.

An itemized summary of Emerge's 2010 and Q4 2010 accomplishments is outlined below.

DRILLING AND CAPITAL

  • Emerge significantly increased its capital program in 2010 as compared to 2009. The Company pursued various drilling and well reactivation opportunities on lands acquired through its two significant acquisitions of heavy and medium oil assets completed in 2009.
  • Emerge drilled 66 wells at 100% working interest ownership and operatorship in 2010, resulting in 64 oil wells, 1 service well and 1 well which was dry & abandoned in a non-core area, establishing a 98% drill bit success rate.
  • Emerge drilled 19 wells at 100% working interest ownership and operatorship in Q4 2010, resulting in 18 oil wells and 1 service (100% success rate).
  • The 2010 drilling program was concentrated in the Company's greater Lloydminster area, where vertical wells are typically drilled to depths of 600-700 meters and target multiple heavy oil zones including the Sparky, General Petroleums, Colony, McLaren and Waseca. The Company's drilling success was focused in the Silverdale, Furness, Epping, Lashburn and Freemont fields.
  • Exploration and development expenditures totalled $88 million in 2010 as compared to $27 million in 2009. Capital investments during 2010 were allocated $23 million (26%) to drilling and completions, $29 million (33%) to well equipment, $14 million (16%) to well reactivations and recompletions, $14 million (16%) to facilities and gathering systems and $8 million (9%) to land, seismic and other.
  • Exploration and development expenditures totalled $36 million in Q4 2010 as compared to $12 million in Q4 2009. Capital investments in during Q4 2010 were allocated $8 million (22%) to drilling and completions, $12 million (33%) to well equipment, $4 million (11%) to well reactivations and recompletions, $10 million (28%) to facilities and gathering systems and $2 million (6%) to land, seismic and other.
  • Net acquisition costs totalled $9.8 million in 2010, and included one acquisition of heavy oil assets for cash consideration of approximately $9.9 million offset by one minor property disposition for net proceeds of $0.1 million. 
  • The Company completed the majority of its well reactivation and recompletion opportunities during 2010 on suspended wells acquired through its 2009 acquisitions, and made significant progress on its reactivation program in the Ear Lake and Reward areas which were acquired in Q2 2010. These projects have contributed low-cost production and reserves additions primarily through the use of underbalanced foam stimulation.

PRODUCTION

  • 2010 average sales volumes increased 296% to 4,922 boe/d (98% oil), from 1,244 boe/d in 2009.
  • Q4 2010 average sales volumes increased 149% to 6,067 boe/d (97% oil), from 2,440 boe/d in Q4 2009.
  • Emerge exited 2010 producing approximately 6,600 boe/d based on field production reports, an increase of 53% from 4,300 boe/d at exit 2009.
  • Emerge's 2010 production growth was achieved primarily through its successful drilling and well reactivation programs, with one property acquisition adding approximately 400 boe/d on closing in late June 2010.
  • Based on exit production rates (of 6,600 boe/d year-end 2010 and 4,300 boe/d year-end and 2009) and outstanding common shares (of 92.3 million year-end 2010 and 83.0 million year-end 2009), Emerge increased production per share by 38% in 2010 over 2009.
  • The significant growth in Emerge's production in 2010 also resulted in increased fluid handling costs, which put pressure on our operating and transportation expenses. Emerge implemented infrastructure projects in Q4 2010 and Q1 2011 in its core producing fields which are designed to handle increased fluid volumes and reduce reliance on trucking and third party processing and disposal costs. Emerge invested $8 million in the construction of water gathering systems and water disposal facilities in 2010, and undertook a $10 million expansion of its central oil battery due to be completed in April 2011. These projects are anticipated to reduce our average operating and transportation expenses for 2011.

FINANCIAL

  • Oil and NGLs contributed 98% of the Company's total 4,922 boe/d sales volumes, and contributed 99% of the Company's total $110 million of oil and gas revenues in 2010. By comparison, oil and NGLs contributed 82% of the Company's total 1,244 boe/d sales volumes, and contributed 93% of the Company's total $25 million oil and gas revenues in 2009.
  • Funds flow from operations increased 516% to $30.8 million in 2010, from $5.0 million in 2009.
  • Funds flow from operations increased 183% to $6.7 million in Q4 2010, from $2.4 million in Q4 2009.
  • On a per share basis, funds flow increased 227% to $0.36 per share in 2010 from $0.11 per share in 2009, and increased 75% to $0.07 per share in Q4 2010 from $0.04 per share in Q4 2009.
  • Emerge realized stronger operating netbacks of $18.62 per boe in Q4 2010 and $21.68 per boe in 2010, up from $16.90 per boe in Q4 2009 and $16.93 per boe in 2009. The Q4 2010 operating netback was impacted by lower realized heavy oil prices in October and November combined with higher operating expenses.
  • Emerge closed a bought deal equity financing on October 14, 2010 with a syndicate of underwriters of 8.85 million common shares at $3.40 per share for gross proceeds of $30.1 million.
  • As at December 31, 2010, Emerge had $37.4 million of bank debt drawn on its $50.0 million revolving operating credit facility. Subsequent to December 31, 2010 and following the bank's review of Emerge's 2010 year-end independent reserves evaluation, the Company's revolving operating credit facility was increased to $65.0 million, bringing total credit facilities (including the Company's acquisition/development facility) to $75.0 million.

COMMODITY PRICE RISK MANAGEMENT

  • While the Western Canadian Select heavy oil benchmark price improved 14% from 2009 to average $67.18/bbl in 2010, monthly prices fluctuated during the year, from a low of $57.25/bbl in September 2010 to a high of $75.43/bbl in December 2010. Much of the variability in heavy oil pricing differentials during 2010 arose from transportation bottlenecks caused by downtime and restrictions on major pipelines delivering Canadian crude into the U.S.
  • Emerge executed two risk management contracts during 2010 to provide greater certainty over its cash flows in 2011, thereby protecting a portion of the Company's 2011 capital program. The contracts are summarized as follows:
Type of Contract   Commodity   Price   Index   Volume   Term
Financial (Swap) (1)   Heavy oil   C$70.00/bbl   WCS   1,000 bbls/d   Calendar 2011
Financial (Swap) (1)   Heavy oil   C$74.00/bbl   WCS   1,000 bbls/d   Calendar 2011

 (1) Swap indicates fixed price payable to Emerge in exchange for floating rate payable to counterparty.

  • Subsequent to December 31, 2010, Emerge entered into the following financial commodity price contract:
Type of Contract   Commodity   Price   Index   Volume   Term
Financial (Swap) (1)   Heavy oil   C$81.00/bbl   WCS   1,000 bbls/d   Calendar 2012

 (1) Swap indicates fixed price payable to Emerge in exchange for floating rate payable to counterparty.

  • Emerge continues to monitor the market for additional hedging opportunities that fit within the Company's overall risk management strategy.

RESERVES

  • Total proved ("1P") reserves on a company interest basis (which is before royalty deductions but including royalty interests), as evaluated by McDaniel and Associates Consultants Ltd. ("McDaniel") at December 31, 2010, were 5,025 mboe. This represents a 66% increase from the 3,022 mboe 1P reserves at December 31, 2009.
  • Total proved plus probable ("2P") reserves on a company interest basis, as evaluated by McDaniel at December 31, 2010, were 13,632 mboe. This represents a 51% increase from the 9,016 mboe 2P reserves at December 31, 2009.
  • 2P reserves per basic common share increased 36%, to 148 boe per 1,000 shares at year-end 2010 from 109 boe per 1,000 shares at year-end 2009.
  • The net present value of future net revenue at 10% discount rate before income taxes increased to $284 million, up from $172 million reported in 2009 representing an increase of 65%.
  • 1P reserves additions in 2010 replaced 244% of production and 2P reserves additions replaced 357% of production.
  • Finding and development costs, including changes in future development costs, were $17.04 per boe on a 2P basis, and all-in finding, development and acquisitions costs, including changes in future development costs, were $17.09 per boe on a 2P basis.
  • The Company's 2P reserve life index (based on Q4 2010 average sales of 6,067 boe/d) improved to 6.2 years, up from 5.7 years reported at year-end 2009.

For additional information, please refer to Emerge's reserves news release dated February 24, 2011 (posted on www.sedar.com).

Q1 2011 UPDATE

Emerge has been very active to-date in Q1 2011. The Company has drilled a total of 21 (20.4 net) wells, including 15 (15.0 net) development wells in the Lloydminster area, our 4 (3.5 net) commitment wells on our farm-in lands in south Lloydminster, 1 (1.0 net) service well and 1 (0.9 net) well at our Coronation property targeting Viking light oil. Emerge has realized a 98% net success rate on its program and is in various stages of completing, equipping and placing new wells on production.

Emerge is currently producing approximately 6,700 boe/d based on field reports. Q1 2011 sales volumes have been impacted by the shutting in of key producing wells in Silverdale, Furness and Freemont as we drilled offset wells in these areas in Q1 2011 and also by facility constraints during the construction of our Silverdale central oil battery and treating facility expansion.

Emerge is excited about its future prospects, including its emerging Viking light oil play which in 2011 to-date Emerge has drilled its first (0.9 net) well on owned lands and in January 2011 executed a farm-in agreement providing the Company access to an additional 28 net sections of prospective Viking acreage to the south of Emerge's existing lands and medium oil operations. The Company has drilled and frac'd its first Viking well for a gross capital cost of approximately $1.7 million, and the well is currently being tied-in. The Company anticipates releasing additional information once production rates have been established. Emerge has a corporate drilling inventory of over 500 defined and contingent drilling locations targeting multiple light, medium and heavy oil and which include a mixture of low and medium risk exploration and development opportunities.

Emerge's annual general meeting has been scheduled for 2:00 pm on Wednesday, May 11, 2011. Further information will be provided to shareholders with the Company's information circular and proxy materials.

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 area of east-central Alberta. Emerge is headquartered in Calgary, Canada.

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: the size and composition of Emerge's drilling inventory; timing and extent of capital expenditures; and realization and timing of future production rates in particular in relation to the Company's well targeting Viking light oil.

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: 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.

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