Fairborne Energy Ltd.

Fairborne Energy Ltd.

August 28, 2012 19:02 ET

Fairborne Energy Announces Strategic Transactions to Create a Deep Basin Focused Growth Company

CALGARY, ALBERTA--(Marketwire - Aug. 28, 2012) - Fairborne Energy Ltd. (TSX:FEL) ("Fairborne" or the "Company") is pleased to announce that it has entered into two asset purchase and sale agreements (the "Agreements") for the divestiture of certain dry natural gas assets (the "Disposition Assets") of the Company for gross proceeds of $189 million, subject to certain closing adjustments and conditions (the "Transactions"). Closing of the Transactions are anticipated to occur on or about October 1, 2012.

The Disposition Assets include the Company's greater Marlboro area (Marlboro, McLeod and Westerose) and the Company's shallow gas/coal bed methane assets in the Clive area, which together represent current daily production of approximately 8,700 boe/d (95% natural gas), 23.1 mmboe of proved reserves and 32.8 mmboe of proved plus probable reserves (93% natural gas) as evaluated by GLJ Petroleum Consultants Ltd. ("GLJ") at December 31, 2011, mechanically updated to remove production from January 1, 2012 to July 1, 2012.

The Company currently has $185 million of net debt (before costs associated with previously announced strategic review process). Net proceeds from the Transactions will be used to reduce bank indebtedness and will virtually eliminate the Company's debt.

Going forward Fairborne will focus on the delineation and exploitation of its large land base in the greater Harlech area where the Company has 312 gross (201 net) sections of land in the heart of the liquids rich deep basin fairway. With 4,500 boe/d of current production post-Transactions, a recently announced resource study of 131 mmboe of Economic Contingent Resource (best estimate) attributable to the Company's working interest share in the Cardium and nominal debt, the Company will have the cash flow, balance sheet and inventory of opportunities to deliver significant economic growth for the future.

Strategic Rationale

Despite continued operational success, and significant recent production and reserves per share growth, the deterioration of North American natural gas fundamentals and capital markets volatility has challenged Fairborne's ability to fund growth and realize the value inherent in the Company's asset portfolio. As a result, Fairborne's Board of Directors initiated a strategic review process in March of this year to review all options available to Fairborne to ensure that shareholder value is being maximized.

The Transactions will position the Company as a highly focused, organic growth vehicle with significant balance sheet flexibility to deliver per share growth in production, reserves, cash flow and net asset value. The production base and upside potential of the remaining assets are represented by high working interest, operated, condensate rich production with significant upside in a number of plays at Harlech. These are highlighted by the Cardium, which was recently evaluated by GLJ as to its potential and was assigned an Economic Contingent Resource best estimate of 131 mmboe and the Wilrich resource play, which is similar to the gas field Fairborne developed at Marlboro, where the Company grew production 325% in the three years since its first Wilrich horizontal well.

With a confirmed post Transactions bank line of $80 million, no funds drawn on its facility and a minor working capital deficit, the Company will maintain the flexibility to continue to develop and exploit the Harlech asset.

Based on these and other factors, the Board of Directors of Fairborne has unanimously approved the Transactions. FirstEnergy Capital Corp. and RBC Capital Markets have acted as advisors to Fairborne with respect to the Transactions and provided fairness opinions with respect to the Transactions.

The Reorganized Company Post Transactions ("New Fairborne")

New Fairborne will pursue an initial strategy of organic growth through the expansion of the Cardium gas-condensate play and initial drilling of the Wilrich play at Harlech.

Key attributes of New Fairborne include:

  • Current Production: 4,500 boe/d
  • Oil and Liquids: 25% (80% oil and condensate)
  • GLJ Resource Study of Cardium Resource: 131 mmboe (best estimate) (1)
  • Confirmed Credit Facility: $80 MM
  • Unbooked Cardium Hz Drilling Locations: 330 Gross/183 Net (4)
  • Operating Netbacks: $15.50/boe
  • Common Shares Outstanding: 102.6 MM

Working Interest Reserves (2,3)

MMBOE Pv10 ($MM) Pv10/Share Undiscounted Future Development Capital ($MM)
Proved Developed Producing 10.5 180.2 $1.76 1.1
Total Proved 15.3 242.0 $2.36 51.0
Proven Plus Probable 23.0 329.7 $3.21 80.5


(1) Based on the resource study effective March 31, 2012 prepared by GLJ (the "Resource Study).

(2) Based on the Company's independent reserve evaluation ("the GLJ Report") effective December 31, 2011 using forecast January 1, 2012 GLJ pricing and costs, post all dispositions since December 31, 2011 (including the Transactions), mechanically updated to remove production from January 1, 2012 to October 1, 2012.

(3) Reserve values are the before tax present values of future net revenues at a 10% discount rate as per the GLJ Report and do not necessarily represent fair market value.

(4) Well locations utilized by GLJ arriving at the best estimate of economic contingent resources.

Operations Update, Outlook and Guidance

Current production excluding the Disposition Assets is approximately 4,500 boe/d (25% oil and liquids) based on field estimates. Fairborne has drilled two (1.5 net) Cardium horizontals in the Harlech area (located on the southern end of the Ram Barrier trend) that were designed to test the viability of exploiting the resource with horizontal wells and to refine both the drilling and stimulation techniques required to unlock the economics of the play. Within the Cardium Ram Barrier trend (30 miles wide and 225 miles long running generally parallel and immediately east of the Rocky Mountain foothills) being pursued by New Fairborne there are currently 2,725 producing vertical wells, 163 producing horizontal wells and a total of 13,350 wells that have been drilled through the Cardium.

Fourth quarter of 2012 activity and guidance:

  • Exploration and development drilling activity will be comprised of one horizontal Wilrich well, one Cardium horizontal well and one multi-zone vertical well,
  • Average production of 4,700 - 4,900 boe/d (25% liquids),
  • Operating netbacks forecast of $15.50 per boe, and
  • Exit production of 5,000 - 5,300 boe/d (25% liquids).

The Fairborne team will be focused on the organic growth of its multi-zone Harlech asset with initial concentration on three play types;

  • Cardium - conversion of the substantial Cardium resource identified and validated through the first two successful horizontal wells into reserves
  • Wilrich - initial delineation and play validation work will commence with the drilling of the Company's first Wilrich horizontal well in the north Harlech area
  • Multi-zone Vertical - the Harlech area has traditionally been developed with vertical, multizone wells and the Company has a deep inventory of these remaining and with significant liquids yields these wells have competitive economics in today's commodity price environment

The Company intends to dedicate capital commensurate with cash flow over the medium term with investments aimed at prudently de-risking our resource plays.

The Company will retain its interest in the Clive oil field where work is progressing on an exciting CO2 flood to capture significant remaining oil reserves. Production from the Company's Wild River well is scheduled to recommence in September after being shut-in due to low gas prices.

Fairborne is a crude oil and natural gas exploration, development and production company headquartered in Calgary, Alberta, Canada. Fairborne's common 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 operations, various matters relating to the Transactions, including timing of closing the Transactions, use of proceeds from the Transactions, the effect of the Transactions on continuing operations, future anticipated available credit facilities, future strategy and plans including drilling plans of the Company, Q4 estimated average production and commodity mix, 2012 estimated exit production and commodity mix, expected capital expenditures, 2012 Q4 operating netbacks and the timing of recommencement of production from the Company's Wild River wells. 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 the Transactions, ability to access sufficient capital from internal and external sources and risks related to satisfying the conditions to closing of the Transactions and the effects thereof. 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.


Netbacks are calculated by subtracting royalties transportations costs and operating costs from revenues

Contingent Resources:

Contingent resources referred to herein are based on the Resource Study effective March 31, 2012 prepared by GLJ. 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.


The estimates of reserves and future net revenue for individual properties may not reflect the same confidence level as estimates of reserves and future net revenue for all properties, due to the effects of aggregation. The net present value of future net revenue of reserves does not represent the fair market value thereof.

Barrels of Oil Equivalency:

Natural gas volumes are converted to barrels of oil equivalent (boe) on the basis of 6,000 cubic feet (Mcf) of gas for 1 barrel (bbl) of oil. The term "barrels of oil equivalent" may be misleading, particularly if used in isolation. A boe conversation ratio of 6 Mcf to 1 bbl 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 the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.

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