FairWest Energy Corporation
TSX : FEC

FairWest Energy Corporation

August 15, 2007 13:59 ET

FairWest Energy Corporation Announces Financial and Operating Results for Second Quarter 2007

CALGARY, ALBERTA--(Marketwire - Aug. 15, 2007) - FairWest Energy Corporation ("FairWest") (TSX:FEC) is pleased to provide its financial and operating results for the second quarter of 2007.

The most significant development during the first half of 2007 was the May 23, 2007 acquisition of Strike Petroleum Ltd. "(Strike"). Pursuant to the terms of the plan of arrangement, FairWest has issued 12,164,500 common shares to acquire Strike. A further 3,243,701 common shares and approximately $1.76 million cash have been issued to Strike's unsecured creditors, representing 59% of the total amounts due on January 24, 2007 by Strike to its unsecured creditors. The remaining 18 unsecured creditors will be paid approximately 2,387,973 FairWest common shares and $1.2 million cash. Strike's secured creditor is due approximately $11.1 million. Strike is now a wholly owned subsidiary of FairWest.

The following chart discloses the elements of FairWest's consolidated working capital deficiency of $19,821,670. Strike is solely responsible for $15,984,191 of this working capital deficiency and there is no recourse against FairWest or its assets. FairWest has acquired $3,161,173 of Strike's unsecured debt. In order to rectify this deficiency, FairWest intends to sell $2.0 million of subordinated debt and $7.1 million of assets. The proceeds from these sales, together with expected credit facilities, will be sufficient to rectify the June 30, 2007 working capital deficiency and carry on FairWest's planned capital expenditure plan.



June 30, June 30,
2007 2007 June 30,
FairWest Strike 2007
Unconsolidated Unconsolidated Total
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$ $ $
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Current Assets -
Cash 253 - 253
Accounts receivable 1,254,908 1,374,824 2,629,732
Due from Strike 3,161,173 - 3,161,173
Due from related party 469,654 - 469,654
Prepaid expenses 193,093 311,222 504,315
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Total $ 5,079,081 $ 1,686,046 $ 6,765,127
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Current Liabilities
Accounts payable 2,481,352 3,409,064 5,890,416
Bank loan payable 6,135,151 11,100,000 17,235,151
Due to FairWest - 3,161,173 3,161,173
Notes payable 300,057 - 300,057
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Total $ 8,916,560 $ 17,670,237 $ 26,586,797
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Unconsolidated Working
Capital Deficiency $ (3,837,479) $(15,984,191)$(19,821,670)
Inter-company indebtedness (3,161,173) 3,161,173 -
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Consolidated Working Capital
Deficiency $ (6,998,652) $(12,823,018)$(19,821,670)
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A summary of operational and financial highlights for the three months and
six months ended June 30, 2007 and June 30, 2006 follows:


Three Months ended Six Months ended
June 30, June 30,
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Financial Highlights 2007(1) 2006 2007(1) 2006
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$ $ $ $

Revenue
Petroleum and natural
gas sales, net of
royalties 1,516,920 1,122,561 2,506,060 1,925,147
Other income 11,278 - 31,025 347,894
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Total revenue 1,528,198 1,122,561 2,537,085 2,273,041
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Expenses
Depletion, depreciation
and amortization 1,759,940 697,487 2,936,328 1,419,614
Operating 575,953 473,522 1,048,488 789,069
Interest 96,772 69,422 189,563 108,960
General and
administrative 571,368 209,433 927,677 526,759
Stock-based compensation 86,018 72,338 159,062 72,338
Part XII.6 tax 25,177 43,814 57,038 76,235
Future income tax
(recovery) (1,122,957) - (1,484,059) (1,866,461)
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Total expenses 1,992,271 1,566,016 3,834,097 1,126,514
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Net income (loss) (464,073) (443,455) (1,297,012) 1,146,527
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Funds flow from operations 258,927 254,032 314,318 351,780
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Capital expenditures 21,299,837 895,911 23,507,489 1,361,595
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Basic earnings (loss)
per share (0.007) (0.008) (0.020) 0.021
Diluted earnings (loss)
per share (0.007) (0.008) (0.020) 0.021
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Share Data:
Common shares
outstanding 87,038,340 55,256,144 87,038,340 55,256,144
Warrants 2,400,000 3,000,000 2,400,000 3,000,000
Options 6,849,116 4,674,116 6,849,116 4,674,116

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Highlights of Operations
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Natural gas
Natural gas sales before
royalties($) 1,659,913 798,609 2,726,577 1,623,429
Volume - mcf 227,589 124,906 366,948 229,275
Volume - mcf/day 2,501 1,373 1,921 1,200
$/mcf 7.29 6.39 7.43 7.08
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Oil and NGLs
Oil and NGL sales before
royalties($) 220,735 339,172 388,119 626,596
Volume - bbl 3,696 5,050 6,737 10,184
Volume - bbl/day 41 55 35 53
$/bbl 59.72 67.16 57.61 61.53
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Barrel of oil equivalent
Total sales before
royalties($) 1,880,648 1,137,781 3,114,696 2,250,025
Volume - boe 41,628 25,868 67,895 48,397
Volume - boe/day 458 284 355 253
$/boe 45.18 43.98 45.88 46.49
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(1) Includes operations of Strike from May 23, 2007 (39 days).


Production and Revenue

During the quarter, average daily production increased 57% over the prior three-month period to 458 barrels of oil equivalent per day ("boe/d"), comprised of 2,501 thousand cubic feet per day ("mcf/d") of natural gas and 41 barrels per day ("bbls/d") of oil and natural gas liquids. Oil and natural gas sales, net of royalties was $1,516,920 compared to $989,140 in the prior quarter. Exit production for FairWest and Strike at June 30, 2007 was 600 boe/d.

FairWest and Strike have entered into the following physical contract to manage fluctuations in commodity prices in the normal course of operations:

- In February 2007 Strike entered into a physical contract to sell 1,000 GJ/day of natural gas in Canada from April 1 2007 to October 31 2007 for $7.50/GJ.

- In June 2007 FairWest entered into a physical contract to sell 3,000 GJ/day of natural gas in Canada from November 2007 to March 31 2008 with a ceiling price of $8.55 and a floor price of $8.00

Strike Properties

From May 23 to June 30, Strike contributed to FairWest's average production of 458 boe/d for the 3 months ended June 30, 2007. Due to Strike's lack of financing, these properties have not maintained the production levels estimated by independent engineers or contemplated by FairWest at the time of making the acquisition. The exit production from the Strike properties at June 30, 2007 was 310 boe/d.

FairWest is currently undertaking an optimization and drilling program that is expected to increase production from the Strike lands to 700 boe/d by December 31, 2007 which is more in line with initial estimates from the independent engineers at January 1, 2007. It appears the volumes presented in the January 1, 2007 engineering report will be delayed to December 31, 2007. FairWest will spend $2,400,000 to achieve this outcome. The Kirkpatrick Lake property has 35 underperforming wells tied into a gas gathering system. FairWest has an optimization program planned for eight of these wells. Provided the initial eight wells meet expectations, FairWest will extend the optimization program at Kirkpatrick Lake and Youngstown.

Based on a review of 3D seismic and geological leads, FairWest has agreed to farm in and drill three Belly River gas wells on Strike's acreage at Youngstown. When completed, these wells will be tied in to existing infrastructure in the area.

Asset Acquisition

FairWest intends to close the previously announced acquisition of undeveloped land, seismic and producing oil and gas assets (the "Properties") today. The $4.2 million acquisition complements FairWest's core areas of Antelope, Berry Creek and Provost, Alberta. The Properties, together with complementary oil and gas assets that FairWest holds in the Berry Creek and Provost areas ("FairWest Properties"), will be held by the Neuberry Limited Partnership (LP"). FairWest holds 100% of the limited partnership equity and a 100% subsidiary of FairWest is the general partner of the LP. FairWest's intention is to sell 25% of the assets held by the LP.

The purchase of the Properties will add approximately 120 boe/d of production and significant reserves. Management believes that the assets held by the LP have significant optimization, development, and exploratory opportunities. FairWest plans to expend $2.9 million on the LP's properties and expects to increase FairWest production from the LP to 440 boe/d by year end. FairWest's optimization and drilling program will commence immediately upon closing.

The LP has received a $5.2 million bridge loan commitment from an independent party ("Bridge Financing"). The Bridge Financing is expected to be in place for six months. The proceeds will be used to fund the acquisition of the Properties and to reduce FairWest's indebtedness to it primary lender by $1.0 million. The Bridge Financing will be repaid from the sale of a portion of the LP's assets and from a portion of the proceeds from the sale of FairWest's interest in a net smelter return royalty.

Financing

During the 6 months ended June 30, FairWest issued 1,074,000 flow through common shares at $0.50 per share and 9,295,067 flow through common shares at $0.45 per share for total consideration of $4,719,780. In early July, a further 597,221 flow through common shares at $0.45 per share for total consideration of $268,749.

FairWest has a revolving operating demand loan facility of $5,900,000 that bears interest at the bank prime lending rate plus 0.75 %. The availability under the revolving operating demand loan facility will be reduced to $4,800,000 at August 15, 2007 when the Properties are acquired and the actual amount drawn on the demand loan will be reduced by $1,000,000. At June 30, 2007 the bank prime rate was 6.0%. This loan facility is non-reducing. FairWest also has a non-revolving acquisition/development demand loan facility of $2,000,000 that bears interest at the bank prime lending rate plus 1.0 %. The loan facilities are secured by a $10,000,000 demand debenture with a floating charge over the FairWest assets. At June 30, 2007 there was $5,523,472 drawn on the revolving operating demand loan facility and $611,679 drawn on the non-revolving demand loan.

At June 30, 2007, on a consolidated basis, Fair West did not comply with its requirement to maintain a working capital ratio of not less than 1.0 as calculated using the bank's compliance certificate form. On an unconsolidated basis (excluding the Strike portion of the working capital ratio determination and including the amount due to FairWest from Strike) FairWest did comply with the working capital ratio. Notwithstanding, FairWest has asked the bank for a waiver in respect of this default.

On June 30 2007, Strike had an $11,100,000 demand revolving operating credit facility with a Canadian chartered bank. The facility bears interest at the bank's prime rate plus 0.375% per annum. At June 30 2007, $11,100,000 was drawn on this facility. Strike has pledged as collateral a $20,000,000 first priority floating charge demand debenture over all the assets of Strike. The holder of the Strike credit facilities has no recourse against FairWest or its assets. The facility is subject to Strike meeting certain debt covenants. As at June 30, 2007, Strike did not comply with its working capital covenant and its change of control covenant under its banking agreement.

Subject to regulatory approval, the Board of Directors has approved the sale of convertible debentures for total proceeds of $2 million. The term of the debentures will be two years, commencing on September 1, 2007 and will pay 14% quarterly. Each debenture may convert into 2,222 common shares of FairWest (0.45 per common share).

Outlook

FairWest's ability to fully exploit and carry out its planned exploration and development program is contingent upon the continuation of favourable commodity prices, the maintenance of its existing reserve and production base, current and proposed financing, property sales and internally generated cash flow from operations. For the period ended December 31, 2007 the Company's external engineering reports call for the expenditure of $2,531,000 to develop its proved resource base and $4,461,000 to develop its proved and probable reserve base. A portion of these expenditures have been expended in the first half of the year. Additional funds not contained in the January 1, 2007 external engineering reports will be expended on Strike lands and the LP properties. The cash flow from operations under the expected proved and proved and probable case together with the sale of debentures and property sales is more than sufficient to cover the anticipated capital expenditures. In the event that there is a material drop in commodity prices or a material reduction in FairWest's reserve and production base, FairWest will either curtail some of its planned exploration and development activities or it will sell a portion of its existing assets to fund its capital expenditure program.

FairWest holds a net smelter return royalty interest ("NSR") associated with a gold property located in the Republic of Ghana, Africa. The operator of these properties has recently indicated that these properties will be brought into production in the third quarter of 2008 thereby resulting in income being generated to FairWest. Management is negotiating the potential to sell the NSR either to the operator of the property or to third parties who are in the business of acquiring these types of royalty interests.

The Company is of the opinion that it will be in a position to meet its operational goals for 2007. The recent decline in natural gas prices will reduce the Company's cash flow forecast for 2007. The impact on the Company's debt to cash flow ratio will be offset by the sale of non core and non oil and gas assets.

Acknowledgements

The Board of Directors welcomes Mr. Colin McPhee as a new member of the board. Mr. McPhee has many years of experience in the oil and gas service sector and FairWest looks forward to his future contributions.

Mr. Lyle Reid has tendered his resignation to FairWest's board of directors. Management and the Board of Directors wish to thank Mr. Lyle Reid for his guidance, contributions on our various committees and the assistance given in raising equity funds since the inception of FairWest.

FairWest (TSX:FEC) is a Calgary, Alberta based junior oil and gas company engaged in the acquisition, exploration, development and production of crude oil and natural gas in the provinces of Alberta and Saskatchewan.

Statements in this release which describe FairWest's intentions, expectations or predictions, or which relate to matters that are not historical facts are forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties which may cause the actual results, performances or achievements of FairWest to be materially different from any future results, performances or achievements expressed in or implied by such forward-looking statements. FairWest may update or revise any forward-looking statements, whether as a result of new information, future events or changing market and business conditions.

BOE Disclosure: Disclosure provided herein in respect of barrels of oil equivalent (BOE) may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 Mcf: 1bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Contact Information

  • FairWest Energy Corporation
    James G. Gettis
    President and Chief Executive Officer
    (403) 264-4949
    (403) 269-1761 (FAX)
    or
    FairWest Energy Corporation
    Marion D. Mackie
    Chief Financial Officer
    (403) 264-4949
    (403) 269-1761 (FAX)