Fairborne Energy Ltd.
TSX : FEL

Fairborne Energy Ltd.

August 09, 2012 00:05 ET

Fairborne Announces Second Quarter 2012 Results

CALGARY, ALBERTA--(Marketwire - Aug. 9, 2012) - Fairborne (TSX:FEL) is pleased to provide this summary of its financial and operating results for the second quarter of 2012. A complete copy of the Company's consolidated interim financial statements for the three and six months ended June 30, 2012, along with management's discussion and analysis in respect thereof will be filed on SEDAR and is available on the Company's website at www.fairborne-energy.com.

Highlights
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2012 2011 2012 2011
Financial ($thousands, except per share amounts)
Petroleum and natural gas revenue 31,571 54,442 70,036 102,973
Funds generated from operations (1) 12,898 27,241 30,960 57,074
Per share - basic $0.12 $0.27 $0.30 $0.56
Per share - diluted $0.12 $0.26 $0.30 $0.55
Cash flow from operations (including changes in working capital) (1) 11,972 24,102 30,428 49,198
Per share - basic $0.12 $0.24 $0.30 $0.48
Per share - diluted $0.12 $0.23 $0.30 $0.47
Profit (loss) (2) (44,721 ) 652 (51,961 ) 33,302
Per share - basic ($0.44 ) $0.01 ($0.51 ) $0.33
Per share - diluted ($0.44 ) $0.01 ($0.51 ) $0.32
Exploration and development expenditures 3,939 20,569 45,516 77,922
Marlboro gas plant expenditures - 5,470 - 19,773
Total capital expenditures 3,939 26,039 45,516 97,695
Proceeds from the sale of petroleum and natural gas properties 89,127 17,920 90,127 141,380
Working capital (surplus) deficit (excluding convertible debentures) 8,078 (21,673 ) 8,078 (21,673 )
Convertible debentures - 98,706 - 98,706
Bank indebtedness 183,105 152,227 183,105 152,227
Total debt, including working capital 191,183 229,260 191,183 229,260
Operations
Average production
Natural gas (Mcf per day) 70,485 65,171 73,653 64,365
Crude oil (bbls per day) 1,262 2,287 1,561 2,497
Natural gas liquids (bbls per day) 946 766 916 892
Sulphur (tonnes per day) (3) 7 56 27 62
Total (BOE per day) 13,962 13,971 14,779 14,179
Average sales price (4)
Natural gas ($ per Mcf) 2.02 4.45 2.16 4.40
Crude oil ($ per bbl) 101.81 94.13 95.80 87.47
Natural gas liquids ($ per bbl) 59.37 63.75 65.78 58.60
Sulphur ($ per tonne) 167.39 127.96 122.75 111.94
Netback per BOE ($ per BOE)
Petroleum and natural gas sales (4) 23.60 40.50 25.28 39.82
Other income 0.79 - 0.37 -
Royalties (1.73 ) (6.30 ) (2.25 ) (4.63 )
Operating expenses (7.48 ) (8.89 ) (7.86 ) (9.14 )
Transportation (1.24 ) (1.05 ) (1.09 ) (1.05 )
Operating netback 13.94 24.26 14.45 25.00
Wells drilled (gross) 1 3 12 25
Undeveloped land (net acres) 181,772 228,272 181,772 228,272
(1) The calculation of funds generated from operations and cash flow from operations for the three months ended June 30, 2012 excludes $2.7 million (2011 - $3.7 million) of interest expense which is classified as finance expense. Similarly, for the six months ended June 30, 2011, $5.3 million (2011 - $7.8 million) of interest expense is classified as finance expense.
(2) Included in the net loss for the three and six months ended June 30, 2012 is an after-tax impairment of $34.4 million.
(3) A BOE conversion ratio has been calculated using a conversion rate of one tonne of sulphur to one barrel.
(4) Excludes the change in fair value of derivatives.

Second Quarter Highlights

  • Average second quarter production of 13,962 BOE per day, consistent with the second quarter of 2011, despite property dispositions, production interruptions and the continued shut in of production due to low natural gas prices;
  • Transactions completed in the second quarter generated $91 million in gross proceeds on the disposition of approximately 800 bbls per day of oil production, representing the majority of the Company's properties in Saskatchewan and Manitoba;
  • Production averaging 1,000 BOE per day from the Company's Wild River property remained shut in throughout the second quarter in response to continued low natural gas prices;
  • Second quarter average production was reduced by approximately 600 bbls per day as a result of third party facility turnarounds;
  • Current production is approximately 13,000 BOE per day, with an additional 1,000 BOE per day that remains shut in due to low natural gas prices;
  • Capital spending in the second quarter was limited to $4.0 million, which included drilling one (0.7 net) natural gas well on the Company's Marlboro property;
  • Operating costs of $7.48 per BOE are down 9% from the first quarter of 2012 and 16% lower than the second quarter of 2011;
  • Operating netback of $13.94, reflective of low natural gas prices;
  • Funds generated from operations of $12.9 million ($10.2 million after deducting interest expense) reflected the 53% decrease in the AECO Daily Index compared to the second quarter of 2011;
  • Natural gas hedges on 33,293 Mcf per day at a floor price of $2.06 per Mcf are in place for the third quarter of 2012 with 14,036 Mcf per day hedged at a floor price of $2.05 per Mcf for the fourth quarter of 2012;
  • The Company, with its financial advisors, continues to review and evaluate alternatives as part of its strategic review process.

Operations

Second quarter 2012 production of 13,962 BOE per day was impacted by several factors including property dispositions, production interruptions and economic decisions to shut in certain natural gas properties. The Company disposed of the majority of its producing properties in Saskatchewan and Manitoba (approximately 800 bbls per day of crude oil) through two separate transactions, both of which closed during the second quarter. Fairborne's production was also impacted by several third party turnarounds including the Keyera Nevis gas plant and the Semcams K3 gas plant. With no measurable recovery in natural gas prices, approximately 1,000 BOE per day of production from Wild River was shut-in at the end of the first quarter and will remain shut-in until commodity prices improve.

Fairborne's ability to generate cash flow to support a second half capital expenditure program is a result of the Company's focus on its highest netback properties, including the liquid rich Cardium play at Harlech in the deep basin of west central Alberta.

The Company has drilled two Cardium horizontal wells to date with the second well, which refined and advanced both the drilling and completion techniques, continuing to deliver strong performance with an initial production rate of 1,000 BOE per day and current production of 420 BOE per day, which includes a consistent liquids yield of 50 bbls per MMcf, of which 35 bbl per MMcf is high value condensate. The high liquids yield present in the Cardium wells generates a strong netback of approximately $25.00 per BOE, even in the current low gas environment.

With a current land position of approximately 65,000 net acres and the previously released resource study at March 31, 2012 supporting 131 MMBOE of economic contingent resource (best estimate), attributable to the Company's working interest share, the Company has an extensive inventory (330 gross locations - best estimate) of exploration and development opportunities on this high-netback property.

Outlook

Fairborne's focus for the remainder of 2012 will continue to be on areas that generate the highest returns in the current environment. Maintaining a cash flow based capital expenditure program of $20 million for the balance of 2012, Fairborne will concentrate spending on its highest netback properties, including liquids rich Cardium production at Harlech and high netback/low operating cost development opportunities at Marlboro.

Fairborne is a crude oil and natural gas exploration, development and production company headquartered in Calgary, Alberta, Canada. Fairborne's shares trade on the Toronto Stock Exchange under the symbol "FEL".

Forward Looking Statements:

Certain information set forth in this press release, contain forward-looking statements including management's assessment of future plans and operations, drilling plans, expected activity levels, expected netbacks at Harlech and 2012 capital expenditure budget and the nature of expenditures. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond Fairborne's control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, loss of markets, delays resulting from or the inability to obtain required regulatory approvals, inability to retain and delays in retaining drilling rigs and other services, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the lack of availability of qualified personnel or management, stock market volatility, incorrect assessment of the value of acquisitions, failure to realize the anticipated benefits of acquisitions, ability to access sufficient capital from internal and external sources and risks related to satisfying the conditions to closing of the Clive disposition. The foregoing list is not exhaustive. Additional information on these and other risks that could affect Fairborne's operations and financial results are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com), or at Fairborne's website (www.fairborne-energy.com). Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. The actual results, performance or achievement of Fairborne could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits that Fairborne will derive therefrom. Fairborne disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities laws.

Non-GAAP and Additional GAAP Measures:

This document contains funds generated from operations which is an additional GAAP measure presented in the consolidated financial statements. The Company uses funds generated from operations as a key measure to demonstrate the Company's ability to generate funds to repay debt and fund future capital investment. This document contains the terms "funds generated from operations per share", "cash flow from operations per share", "net debt" and "netbacks" which are non-GAAP financial measures. The Company uses these measures to help evaluate its performance. These non-GAAP financial measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. The Company uses net debt (bank indebtedness plus negative working capital or less positive working capital, excluding convertible debentures) as an alternative measure of outstanding debt. The Company considers corporate netbacks a key measure as it demonstrates its profitability relative to current commodity prices. Netbacks which have no GAAP equivalent are calculated on a BOE basis by deducting royalties, operating costs, and transportation from petroleum and natural gas sales. Fairborne also presents funds generated from operations per share and cash flow from operations per share and such per share amounts are calculated using weighted average shares outstanding consistent with the calculation of profit (loss) per share.

BOE Conversions:

Barrel of oil equivalent ("BOE") amounts may be misleading, particularly if used in isolation. A BOE conversion ratio has been calculated using a conversion rate of one tonne of sulphur to one barrel and six thousand cubic feet of natural gas to one barrel. This conversion ratio of six thousand cubic feet of natural gas to one barrel is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from energy equivalency of 6:1; utilizing a conversion on a 6:1 basis may be misleading as an indication of value.

Contingent Resources:

Contingent resources referred to herein are based on a resource study effective March 31, 2012 prepared by GLJ Petroleum Consultants Ltd. Contingent resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but may not currently be considered commercially recoverable due to one or more contingencies. Contingent resources are in addition to reserves booked as proved, probable and possible. For low, best and high estimates of the contingent resources, further definitions related thereto, positive and negative factors related to the contingent resources and contingencies and risk factors related thereto, please refer to the press release of the Corporation dated May 2, 2012. There is no certainty that it will be commercially viable to produce any portion of the resources.

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