EXALTA ENERGY INC.
TSX : EXA

EXALTA ENERGY INC.

March 20, 2007 08:35 ET

ExAlta Energy Inc. Fourth Quarter 2006 Results

CALGARY, ALBERTA--(CCNMatthews - March 20, 2007) -

NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES.

ExAlta Energy Inc. (TSX:EXA) ("ExAlta") announced its financial and operating results for the twelve months ended December 31, 2006. The Fourth Quarter 2006 Report, including the Financial Statements and MD&A, have been filed today via SEDAR and are accessible at www.sedar.com and on ExAlta's website at www.exalta.ca.

REPORT FROM THE CEO

OVERVIEW

While 2006 represented a challenging year on several fronts for ExAlta, the Corporation has entered 2007 with a solid foundation for growth:

- ExAlta has four Peace River Arch projects which have delivered significant results over the last year and have active ongoing programs in 2007, including:

-- delineation of a new Cretaceous oil pool at Paradise producing 110 boe per day (gross) from the discovery well;

-- tie-in of four new Cretaceous-Triassic natural gas wells at Worsley-Clear Hills, with step-out and infill potential to follow;

-- two new natural gas wells planned to follow-up on a 6 mmcf per day (gross) ExAlta discovery at Clayhurst;

-- ten new wells are planned at Eaglesham to follow-up on the 2006 program, which added 750 boe per day of initial production net to ExAlta from 3.6 net wells drilled.

- Alexis field production has stabilized and planning is underway to implement a pressure maintenance program to offset field declines with significant production additions resulting from a modest capital expenditure.

- Total undeveloped lands have grown to 116,891 net acres, contained entirely in ExAlta's active focus areas, and 3-D seismic coverage has grown to 260 sections.

- Facilities are in place to accommodate production growth in each focus area.

- The Corporation's $27 million capital program for 2007 is to be funded from operations while being projected to deliver year-over-year production per share growth of approximately 50 percent. Net debt is projected to decrease from year-end 2006 levels, ending the year at approximately 1.25 times trailing 12 months' funds from operations.

- The ExAlta team is complete and highly motivated to fulfill expectations.

ExAlta has delivered steady growth over the last 15 months (see chart),
offsetting production setbacks with new additions to increase average production by 27 percent in 2006 over 2005. Production grew by 56 percent from the beginning of the year through year-end and the Corporation achieved particularly strong growth over the most recent three months.

As to the challenges experienced in 2006, commodity prices started on a downward trend for the first time in several years and the Corporation came up short on production targets. Production operating costs were higher than projected due mainly to a high rate of cost inflation in the industry and the impact of several unplanned workovers of new wells at Alexis. Lastly, reserve growth was limited to 5 percent, year-over-year, as new wells were assessed less reserves and negative technical revisions were booked which totalled 1.1 million boe or 19 percent of year-end 2005 proved plus probable reserves.

More specifically, reserve assignments for several new gas wells at Paradise were substantially lower than expected after performance declines late in 2006 led to writedowns of prior year bookings. In addition, exploration wells targeting the Devonian at Worsley and Josephine came in significantly short on expectations. Negative technical revisions were also related to increased watercut and gas decline rates at the Hill 2-3 well and new shallow gas wells at Cherhill, as well as a more conservative reserve assignment related to the uphole potential of the Howard 10-9 discovery. On the positive side, proved plus probable reserve additions from drilling were also approximately 2.6 times production for the year, and proved producing reserves were up by 18 percent.

Looking forward on reserves, it is important to note that the writedowns in 2006 were principally related to three gas wells in the Arch and three shallow gas wells at Alexis - Cherhill and that the remaining reserves related to these wells are neither material nor prone to significant negative technical revisions. It is also important to note that reserves booked in 2006, specifically oil and gas in the Eaglesham and Alexis - Cherhill areas and oil at Paradise, are in reservoirs in which ExAlta has not experienced significant negative revisions. Of ExAlta's year-end 2006 proved plus probable reserves balance, 3.6 million boe or 60 percent of the total are at the Alexis - Cherhill property, mainly associated with the deeper and more reliable Banff and Nordegg zones, and 0.9 million boe or 16 percent are at the Eaglesham, Clayhurst, and Howard properties where reserves are supported by production performance. Proved plus probable reserves of 1.1 million boe or 18 percent of the total at N. Boundary, Boundary Lake, and Worsley are now adjusted to current production declines. With the largest single well net reserves being a Cherhill Banff well with 294 thousand boe and a Howard Wabamun well with 323 thousand boe, no individual well constitutes a material portion of the Corporation's total reserves. As a result, total reserves going in to 2007 have a limited exposure to future negative adjustments.

In terms of 2007 drilling prospects, ExAlta's portfolio of 17.4 net wells average 90 thousand boe of risked reserve additions with the largest single prospect estimated to contribute 100 thousand boe on a net risked basis. As a result, the 2007 budget plan has a lower risk profile designed to ensure reliable reserve growth in 2007.

Having assessed these results, ExAlta has concluded that the Corporation's technical efforts have been successful with complex exploitation projects such as those being carried out at Alexis and Eaglesham. ExAlta has also been successful with exploration projects when approached at a measured pace as has occurred at Clayhurst and Howard. Conversely, the more aggressive, multi-well exploration programs at Worsley, Josephine and Paradise have been disappointing, largely due to the acceleration of step-out drilling prior to determining stabilized production declines from the initial discoveries. As a result, ExAlta plans to focus on its existing exploitation projects and seek to acquire similar projects in the near future while managing exploration initiatives progressively.

FOURTH QUARTER 2006 DRILLING

ExAlta drilled 13 wells during the fourth quarter of 2006, resulting in two oil wells, five natural gas wells, and six dry holes. Both oil wells were completed as 100 percent working interest Ostracod wells at Alexis. A 100 percent working interest natural gas well located in the Boundary Lake area tested at 2.4 mmcf per day and is awaiting tie-in. This well follows on a 1.5 mmcf-per-day test at a 100 percent working interest Boundary Lake well drilled in the third quarter. A 50 percent working interest natural gas well was completed and tied-in at Josephine, and a 100 percent working interest natural gas well was completed and tied-in at the Alexis - Cherhill focus area. The remaining two natural gas wells were drilled at Eaglesham with working interests of 50 percent and 58 percent, the latter of which tested gas at a stable rate of 3.7 mmcf per day over several days. The other Eaglesham well is awaiting testing. An additional Eaglesham well was recompleted in an uphole zone (29 percent working interest), testing at 1.8 mmcf per day. Production has commenced at the two tested Eaglesham wells.

PRODUCTION AND FUNDS FROM OPERATIONS

Fourth quarter 2006 production averaged 2,552 boe per day, an increase of 13 percent over the prior quarter. This growth was achieved primarily through new wells at Eaglesham.

Current production is approximately 3,300 boe per day, and ExAlta estimates that first quarter 2007 volumes will average between 3,100 and 3,200 boe per day. ExAlta has 575 boe per day of tested volumes behind pipe, with 250 boe per day planned to be brought onstream in April and 325 boe per day to be brought on in July or August.

Funds from operations of $17.9 million declined by 11 percent in 2006 compared to 2005 as increased production volumes were more than offset by the impact of lower natural gas prices and increased expenses. Fourth quarter 2006 funds from operations of $4.0 million were 37 percent lower than the fourth quarter of 2005 for the same reasons.

2007 REVISED BUDGET

ExAlta has revised its 2007 budget to take into account a lower commodity price outlook, the escalation of costs in the oil and natural gas industry, and volatility in financial markets. In addition, the potential for attractive oil and natural gas asset and corporate transactions has improved in light of these trends. In this environment, ExAlta's strategy is to adopt a balanced growth approach wherein acquisition opportunities will be pursued in conjunction with organic growth in order to facilitate the Corporation's objective of building a significantly larger company in the short term.

ExAlta's revised commodity price assumptions include summer AECO gas prices of $6.50 per mmbtu, increasing to $8.00 per mmbtu in the fourth quarter of 2007, and an average WTI price of US$60 per barrel for 2007. Consistent with a balanced growth strategy, ExAlta has adjusted its capital program to 32 (17.4 net) wells with total capital expenditures of $27 million. Average daily production for 2007 is expected to be in the 3,400-3,600 boe per day range. Funds from operations under these price and production assumptions are expected to be approximately $31 million. Taking into account planned non-core asset sales of approximately $3 million, the Corporation expects to see net debt exiting 2007 at approximately $39 million or 1.25 times trailing 12 months funds from operations. The impact of acquisitions will be incremental to these estimates.

Of the 32 gross wells in the current budget, four are planned for the Alexis Cherhill focus area and 28 are planned for the Grande Prairie focus area. The number of exploratory and development wells is projected at 19 and 13, respectively, which together represent approximately one-quarter of the Corporation's current prospect inventory. Included in the exploratory well count are seven Wabamun locations targeting the Eaglesham play which has demonstrated a high success rate with the benefit of an extensive 3-D survey.

The $27 million in capital is allocated as follows: $22 million for drilling, completions, and tie-ins; $3 million for facilities; and $2 million for seismic and land acquisition. The proportion of capital allocated to facilities, seismic and land has decreased significantly over prior years as ExAlta has built established land and seismic positions in several core project areas and built facilities to handle ongoing exploration and development drilling and tie-in projects. As a result, the Corporation expects that finding and development costs will decrease to approximately $17 per boe in 2007, allowing the Corporation's recycle ratio to return to the 1.5-2.0 range as achieved in 2004 and 2005.

Unit-of-production operating costs are expected to decline to the $7-$8 per boe range in 2007 from $8.89 per boe in 2006. The expected decline will reflect higher production rates, offset in part by the inclusion of gas processing and transportation charges related to a new gas processing agreement which will deliver higher unit revenues and netbacks with increased unit operating costs. Unit operating costs in 2006 reflected a significant increase in workover expenses, an item that is expected to show a significant reduction in 2007. Unit G&A costs are expected to be approximately $2 per boe in 2007.

FIRST QUARTER 2007 OUTLOOK

ExAlta's drilling program for the first quarter involves several high-impact prospects in areas established by successful drilling in 2006. The first well drilled was a 3-D-defined deep basement structure at Josephine, which encountered tight gas reservoir in the primary target. This well was followed by a Wabamun-Granite Wash test at Howard which was abandoned.

ExAlta drilled two wells (50 percent working interest) in the first quarter at Worsley-Clear Hills, each of which has multi-zone potential. The first well tested two zones with rates of 2.5 mmcf per day and 0.6 mmcf per day. Production testing of the second well is in progress. One development well is planned for March. In total, seven wells will be drilled during the first quarter. ExAlta plans to have 200 boe per day of 450 boe per day now behind-pipe at Worsley-Clear Hills on-stream in early April.

At Eaglesham, where ExAlta is following up on a high success rate in 2006, the first Wabamun well of 2007, in which ExAlta holds a 50 percent working interest, produced 400 barrels per day of clean oil on test. ExAlta has now drilled ten (4.1 net) wells at Eaglesham resulting in five (1.9 net) oil wells, four (1.7 net) gas wells and one (1.0 net) dry hole and has added 750 boe per day in net production with 125 boe per day behind pipe. The second well of the ten well 2007 program will be completed before break-up. ExAlta was successful in augmenting the Corporation's strong land position at Eaglesham in January, adding approximately 4,000 net acres of undeveloped land through Crown land sale. ExAlta now holds approximately 19,000 net acres of undeveloped land at Eaglesham as well as more than 100 sections of 3 D seismic. ExAlta has accumulated a drilling inventory representing several years' activity, identifying multi-zone targets ranging from Devonian oil to Cretaceous gas.

At the Alexis - Cherhill focus area, a Banff-Nordegg well is planned with potential for oil and natural gas, following up on the 1.5 mmcf per day producing well drilled at Cherhill in the third quarter of 2006. Other second quarter highlights will include the continuation of the Eaglesham program, a stepout well at Clayhurst, and the commencement of development drilling at the Paradise Gething oil pool.

ExAlta has recently engaged a reservoir engineering firm to evaluate the implementation of a pressure maintenance scheme for the Alexis oilfield. With an estimated 70 million barrels of original-oil-in-place and a cumulative recovery factor of only 8 percent, ExAlta's management expects that secondary recovery has the potential to add significant production volumes with a modest capital program. The evaluation report is expected to be complete early in the second quarter.

The ExAlta management team plans to maximize operating efficiency in each of its new project areas and to reduce individual project costs during 2007. With a focus on operations and drilling combined with selective acquisitions, the team expects to deliver strong and efficient organic growth from the Corporation's multi-year prospect inventory, while achieving its production and efficiency targets for 2007 and setting the stage for a continuing balanced growth program into the future.

James S. Blair, Chairman and Chief Executive Officer



REVIEW OF OPERATIONS PRODUCTION

Production

Overall Corporate Volumes

Three months Twelve months Twelve months
ended ended ended
December 31, December 31, December 31,
2006 2006 2005
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Crude oil and NGL (bbl per day) 911 853 447
Natural gas (mcf per day) 9,850 8,553 8,124
----------------------------------------------------------------------------
Crude oil equivalent (boe per day) 2,552 2,279 1,801
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Average production during the fourth quarter of 2006 of 2,552 boe per day
brought volumes for the year to 2,279 boe per day, a 27 percent increase
over the average for the prior year.


Three months Twelve months Twelve months
ended ended ended
December 31, December 31, December 31,
2006 2006 2005
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Grande Prairie focus area 1,153 848 913
Alexis - Cherhill focus area 1,399 1,431 888
----------------------------------------------------------------------------
Company total 2,552 2,279 1,801
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Production additions at Paradise, Howard, Clayhurst and Eaglesham helped offset a decline of 400 boe per day at Worsley-Clear Hills (related to the increased watercut at Hill) in bringing average 2006 production at Grande Prairie to 848 boe per day from 913 boe per day in 2005. By the fourth quarter of 2006, these new areas brought production at Grande Prairie up to 1,153 boe per day.

At Alexis - Cherhill, production growth at the Alexis field was responsible for the 60 percent growth in production in 2006 over 2005, while a new natural gas well at Cherhill largely offset Alexis field declines in the fourth quarter of 2006.



NETBACKS

Three months Twelve months Twelve months
ended ended ended
December 31, December 31, December 31,
2006 2006 2005
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average $/boe
Price $ 40.53 $ 42.52 $ 51.33
Royalties (8.28) (8.42) (13.51)
Operating costs (10.08) (8.89) (4.88)
----------------------------------------------------------------------------
Netback $ 22.17 $ 25.21 $ 32.94
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Decreased natural gas prices and increased unit operating costs lowered ExAlta's average netback (or operating margin) to $25.21 per boe in 2006 from $32.94 per boe in 2005. Operating costs increased to $8.89 per boe for the year, as a result of escalating operating costs experienced by oil and natural gas producers in western Canada, and also as a result of unplanned workovers. During the fourth quarter of 2006, netbacks averaged $22.17 per boe, due to decreased oil prices and higher unit operating costs. Unit-of-production operating costs are expected to decline to the $7-8 per boe range in 2007, reflecting a reduction due to higher production rates being offset in part by the inclusion of gas processing and transportation charges related to a new gas processing agreement which will deliver higher unit revenues and netbacks as well as increased unit operating costs.



DRILLING


Three months Twelve months Twelve months
ended ended ended
December 31, December 31, December 31,
Wells Drilled 2006 2006 2005
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross Net Gross Net Gross Net
----------------------------------------------------------------------------
Exploration
Crude oil - - 7 3.7 0 0
Natural gas 4 2.6 18 9.9 7 3.7
Dry 5 2.3 14 8.0 5 2.8
----------------------------------------------------------------------------
9 4.9 39 21.6 12 6.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Development
Crude oil 2 2.0 8 4.8 26 12.4
Natural gas 1 1.0 4 2.8 3 1.4
Dry 1 1.0 3 2.2 3 1.9
----------------------------------------------------------------------------
4 4.0 15 9.8 32 15.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total
Crude oil 2 2.0 15 8.4 26 12.4
Natural gas 5 3.6 22 12.8 10 5.1
Dry 6 3.3 17 10.2 8 4.7
----------------------------------------------------------------------------
13 8.9 54 31.4 44 22.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------


ExAlta drilled 13 gross wells in the fourth quarter of 2006, bringing the total wells drilled in 2006 to 54. The Corporation's drilling success rate averaged 69 percent in 2006 compared to 82 percent in 2005, reflecting a higher proportion of exploration wells and higher risks associated with the pursuit of larger prizes in new areas. The overall success rate in 2006 was better than that projected in the Corporation's business plan. However, reserve additions fell short of expectations, particularly at the deeper plays at Paradise, Worsley and Josephine.



LANDHOLDINGS

Twelve months ended Twelve months ended
December 31, 2006 December 31, 2005
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Developed Land
Gross acres 64,635 53,198
Net acres 29,473 24,718
Average working interest 46% 46%

Undeveloped Land
Gross acres 175,962 114,891
Net acres 116,891 83,910
Average working interest 66% 73%

Total Land
Gross acres 240,597 168,089
Net acres 146,364 108,688
Average working interest 61% 65%
----------------------------------------------------------------------------
----------------------------------------------------------------------------


ExAlta's net undeveloped landholdings increased by 39 percent at the end of 2006 from the end of 2005 as a result of the Corporation's success in establishing several new exploration and development projects in the Grande Prairie focus area.



CAPITAL EXPENDITURES

Capital Expenditures ($ thousands) 2006 2005
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Drilling and completions $ 55.2 $ 21.6
Facilities and equipment 9.6 9.4
Land 6.0 5.0
Seismic 5.8 2.2
Property acquisitions 0.7 0.6
----------------------------------------------------------------------------
Total finding, development and acquisition
expenditure (1) $ 77.3 $ 38.8
Equipment inventory 1.8 -
----------------------------------------------------------------------------
Total capital expenditure $ 79.1 $ 38.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Changes in future development cost in 2006 were $(105) thousand for
proved reserves and $1,286 thousand for proved plus probable reserves.


Finding, development and acquisition expenditures increased by 99 percent to $77.3 million in 2006, with $21.4 million or 28 percent dedicated to facilities, land and seismic. As a result of significant investments in facilities, land and seismic over the last two years, ExAlta is well-positioned going into 2007 with a substantial prospect inventory and facilities largely in place to accommodate production additions.



RESERVES
Present Value
Gross Reserves Crude Before Tax
(forcast prices Oil & NGL Natural Gas Combined 0% 10%
and costs) (mbbls) (mmcf) (mboe) $million $million
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Proved reserves
Developed producing 1,434 8,675 2,881 70.2 55.6
Developed non-producing 115 2,076 461 10.0 8.0
Undeveloped 788 128 809 20.9 10.6
----------------------------------------------------------------------------
Total proved 2,337 10,879 4,151 101.1 74.2
Probable 944 4,683 1,725 44.0 23.2
----------------------------------------------------------------------------
Total proved plus probable 3,281 15,562 5,876 145.1 97.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------


One-hundred percent of ExAlta's reserves were evaluated as at December 31, 2006 by GLJ Petroleum Consultants Ltd. (GLJ), independent reserve engineers.

During 2006 the Corporation increased its total proved plus probable reserves from 5.6 million boe at year-end 2005 to 5.9 million boe at December 31, 2006, despite booking negative technical revisions of 1.1 million boe. Of total proved plus probable reserves, approximately 71 percent are considered proved (90 percentile confidence level). Approximately 56 percent of year-end proved plus probable reserves are oil and natural gas liquids.

Virtually all of ExAlta's 2006 reserve additions were made through the drill bit, replacing 260 percent of the year's production and helping position ExAlta to maintain growth in production volume going forward. Using ExAlta's fourth quarter production rate of 2,552 boe per day, the Corporation has a reserve-life-index related to proved plus probable reserves of 6.3 years.



Proved plus
Proved Probable
Reserves Reconciliation (mboe) (mboe)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Opening balance, 12/31/2005 3,941 5,598
Discoveries, extensions, and infill drilling 1,472 2,161
Technical revisions (454) (1,084)
Acquisitions 24 33
Production (832) (832)
----------------------------------------------------------------------------
Closing balance, 12/31/2006 4,151 5,876
----------------------------------------------------------------------------
----------------------------------------------------------------------------


In 2006, proved plus probable reserve additions from new discoveries, extensions and infill drilling were approximately 2.6 times 2006 production, although additions did not meet expectations. In particular, proved plus probable reserve additions in the deeper plays at Paradise, Worsley and Josephine contributed significantly less than forecast in the Corporation's budget.

Negative technical revisions to the year-end 2005 proved plus probable reserves totalled 1,084 mboe. The principal components were: 429 mboe at Boundary Lake relating mainly to declines at the Hill 2-3 well; 204 mboe at Cherhill relating to water cut and accelerated declines at several shallow gas wells; 200 mboe at Howard relating to a more conservative estimate of the uphole zone potential; and 196 mboe at N. Boundary relating to steeper than projected declines at new Triassic and Mississippian wells which began production in 2006.



NET ASSET VALUE

As at December 31 ($ millions, except per share amounts) 2006 2005
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Proved plus probable reserves(i) $ 97.4 114.6
Undeveloped land: ExAlta valuation 22.5 12.6
Seismic data: ExAlta valuation 11.8 7.9
Working capital deficiency (44.3) (6.3)
Capital lease obligations (6.2) (4.8)
Option proceeds 3.0 5.7
----------------------------------------------------------------------------
Net asset value $ 84.2 $ 129.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net asset value per share (basic)(ii) $ 2.28 $ 3.98
Net asset value per share (fully diluted)(ii) $ 2.26 $ 3.82
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) Based on GLJ report as at December 31, 2006, net present value before
tax, 10 percent discount rate.
(ii) Basic based on 35.6 million shares and diluted based on 37.3 million
shares including in the money options.

Contact Information

  • ExAlta Energy Inc.
    James S. Blair
    Chairman & Chief Executive Officer
    (403) 206-2404
    or
    ExAlta Energy Inc.
    Ian R. Robinson
    Vice President & Chief Financial Officer
    (403) 206-2410