FairWest Energy Corporation

FairWest Energy Corporation

November 14, 2007 21:22 ET

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

CALGARY, ALBERTA--(Marketwire - Nov. 14, 2007) - FairWest Energy Corporation ("FairWest") (TSX:FEC) presents its consolidated financial statements including the accounts of its wholly owned subsidiary Strike Petroleum Ltd. ("Strike") from the May 23 2007 date of acquisition and the wholly owned partnership Neuberry Limited Partnership ("Neuberry").

A summary of operational and financial highlights for the three months and nine months ended September 30, 2007 and September 30, 2006 follows:

Three Months ended Nine Months ended
Financial Highlights Sept. 30, Sept. 30,
2007 2006 2007 2006
$ $ $ $

Petroleum and natural gas
sales, net of royalties 2,169,122 1,236,102 4,675,182 3,161,249
Other income 634,768 - 665,793 347,894
Total revenue 2,803,890 1,236,102 5,340,975 3,509,143
Depletion, depreciation
and amortization 2,177,154 714,978 5,113,482 2,134,592
Operating 1,004,415 487,706 2,052,903 1,276,775
Interest 425,679 76,230 702,858 185,190
General and administrative 394,003 46,997 1,234,064 573,756
Stock-based compensation 106,066 114,418 265,128 186,756
Part XII.6 tax 12,927 1,281 69,965 77,516
Loss on sale asset 378,958 - 378,958 -
Future income tax
(recovery) (158,401) 75,027 (1,642,460) (1,791,434)
Total expenses 4,340,801 1,516,637 8,174,898 2,643,151
Net income (loss) (1,536,911) (280,535) (2,833,923) 865,992

Funds flow from
operations 966,866 623,888 1,281,185 1,048,011
Capital expenditures 7,052,703 4,339,276 30,560,193 5,700,871

Basic earnings (loss)
per share (0.02) (0.005) (0.04) 0.016
Diluted earnings (loss)
per share (0.02) (0.005) (0.04) 0.016

Share Data:
Common shares
outstanding 90,242,379 60,962,044 90,242,379 60,962,044
Warrants - 3,000,000 - 3,000,000
Options 7,803,748 5,899,116 7,803,748 5,899,116

Three Months ended Nine Months ended
Highlights of Operations Sept. 30, Sept. 30,
2007 2006 2007 2006
Natural gas
Natural gas sales before
royalties($) 1,798,413 684,720 4,524,990 2,308,149
Volume - mcf 295,157 117,637 662,105 346,912
Volume - mcf/day 3,208 1,279 2,425 1,271
$/mcf 6.09 5.82 6.83 6.65
Oil and NGLs
Oil and NGL sales before
royalties($) 551,680 279,390 939,799 905,986
Volume - bbl 8,295 4,261 15,032 14,445
Volume - bbl/day 90 46 55 53
$/bbl 66.51 65.57 62.52 62.72
Barrel of oil equivalent
Total sales before
royalties($) 2,350,093 964,110 5,464,789 3,214,135
Volume - boe 57,488 23,867 125,383 72,264
Volume - boe/day 625 259 459 265
$/boe 40.88 40.40 43.58 44.48
(1) Includes operations of Strike from May 23, 2007 (131 days).
(2) Includes operations of NLP from August 2, 2007 (60 days)

The third quarter 2007 was a successful and positive period for the FairWest team. In addition to the completion of the Strike Petroleum Ltd. acquisition, FairWest also completed an acquisition of assets in its core areas. Both of these acquisitions represent strategic opportunities that make financial and operational sense for FairWest and its shareholders. By applying FairWest's exploitation cycle to existing and new assets, FairWest has seen a 36% increase in production in the third quarter from the prior three month period. Activity in the fourth quarter continues, and continued successes during the balance of the year are anticipated.

Production and Revenue

Average daily production during the quarter increased to 625 barrels of oil equivalent per day ("boe/d") from 458 boe/d in the prior three month period, representing a 36% increase. Production was comprised of 3,208 thousand cubic feet per day ("mcf/d") of natural gas and 90 barrels per day ("bbls/d") of oil and natural gas liquids. At mid-November, production volumes have increased to approximately 725 boe/d.

The substantial increase in production is primarily attributable to:

- the May 23, 2007 acquisition of Strike. FairWest has farmed in on Strike lands and has completed extensive workovers on the Strike wells in the second and third quarters, resulting in increased production; and

- a $4.2 million core area asset acquisition completed on August 15, 2007 and subsequent optimization work on an oil-producing property that was part of the acquisition. During the period, an additional 12 wells were brought on production that had previously been shut in.

FairWest's commodity mix for the third quarter was 85% natural gas and 15% crude oil and natural gas liquids, compared to 91% and 9% respectively in the last quarter. This change in commodity mix is due primarily to the core area asset acquisition. Due to strong crude oil commodity prices, crude oil and natural gas liquids revenues represented 23% of total sales before royalties during the period. FairWest received an average $66.51 per barrel of oil and natural gas liquids and $6.09 per mcf for natural gas during the period compared to $59.72 and $7.29 respectively during the prior period. Total sales before royalties was $2,350,093.


Five wells were drilled in the third quarter, resulting in one oil well that is already on production and three gas wells that are currently being tied in for production by December 1, 2007. The fifth well is currently being evaluated.

FairWest incurred $1,004,415 in operating costs that included optimization costs on acquired assets. Many of the costs incurred during the quarter were well servicing and repair costs on Strike wells that had been neglected for several years and needed maintenance. Some of these were one time costs. Operating costs on a $/boe basis decreased to $17.47 from $20.43 per boe and FairWest anticipates a continued decline in per unit costs during the fourth quarter with increasing production.

Financial Outlook:

FairWest has entered into an agreement to sell its interest in a net smelter return royalty ("NSR Royalty") in the Benso property in Ghana, Africa. This non-oil & gas asset was previously valued at $2,172,323. The proceeds of $1,875,000 US from this sale are being held in escrow pending finalization of registration in Ghana. Closing is expected to occur by November 30, 2007. FairWest wrote down the asset by $378,958 during the quarter based on the sale price and estimated closing costs of $75,000 US.

At September 30, 2007 FairWest had a working capital ratio of 0.87 which is less than 1.0 as calculated using the bank's compliance certificate form. The Company has asked the bank for a waiver in respect of this default and anticipates that this will be issued.

As of September 30, 2007 FairWest had a consolidated working capital deficiency of $22.0 million. Notwithstanding accounts receivable that are offset against current liabilities, consolidated debt obligations are equal to $22.6 million, broken down as follows:

- FairWest had a bank loan payable of $5.0 million due to the National Bank of Canada ("National Bank"), and a promissory note due for $0.5 million.

- FairWest's wholly owned partnership Neuberry had a Bridge Financing of $5.2 million. The $5.2 million relating to Neuberry is a bridge loan commitment from an independent party ("Bridge Financing"). The proceeds were used to fund FairWest's $4.2 million core area asset acquisition and to reduce FairWest indebtedness by $1.0 million to its primary lender. The Bridge Financing is expected to be repaid by January 31, 2008.

- FairWest's wholly owned subsidiary Strike had $10.7 million due to a Canadian chartered bank ("Strike Lender") and approximately $1.2 million due to creditors who were arranged under the Plan of Arrangement.

The course of action described below has been developed to reduce the overall working capital deficiency to $13.0 million plus $2.0 million of 14% secured convertible debentures ("Debentures") by December 31, 2007. The term of the debentures will be two years, and will pay interest on a quarterly basis. Each debenture may convert into 2,222 common shares of FairWest (0.45 per common share).

The main elements of the plan are as follows:

1. Sell $2.0 million of Debentures.

2. Close the sale of FairWest's interest in the NSR Royalty for $1,800,000 US net to FairWest.

3. The National Bank debt will be reduced by $1.0 million through the sale of Debentures.

4. The promissory note of $0.5 million due will be converted to a Debenture.

5. The Bridge Financing debt will be reduced by the sale of $5.2 million of assets currently held by Neuberry and FairWest.

6. The Strike Lender debt will be reduced by $1.7 million through the realization of $0.4 million of ARTC receivable, the sale of $1.0 million of non core assets and the realization of $0.3 million of operating income. The remaining amount due to Strike Lender will be repaid in January 2008 from the proceeds of an expected bank line from the National Bank. Management is presently negotiating a forbearance agreement with the Strike Lender to permit this to occur.

7. Strike creditors will be paid $0.6 million and the balance will be paid out in the first six months of 2008.

8. FairWest will finance its capital expenditures with cash flow from operations, proceeds from the sale of the NSR Royalty, and the balance of funds received from the sale of Debentures.

The new Alberta royalty regime will be implemented in January 2009. FairWest does not believe the impact will be significant due to the production profile of its wells. For 2007, royalties as a percentage of sales remains low as FairWest is able to utilize increased crown royalty deductions.

Operations Outlook:

FairWest's operations team has completed a thorough review of the projects that can be reasonably completed during 2007. As a result, FairWest has updated its projection of year end production to 1,100 boe/d. Current production is approximately 725 boe/d. Projects for the balance of the year include tie-ins of completed and tested gas wells in Kirkpatrick Lake, Youngstown, and Antelope and additional optimization projects in Antelope and Provost, Alberta. Also in 2007, FairWest plans to shoot three new proprietary seismic programs and drill four additional wells.

Acknowledgements from the President:

"At FairWest, we operate with a relatively small core of employees and management. With an active operations program, as well as the completion of both the Strike acquisition and the purchase of a sizeable and relatively complex package of core area assets, this quarter has had its workload challenges for our team. I would like to acknowledge the amazing group of people I am privileged to work with, every one of whom stepped up to the plate and delivered. And, this heavy workload has affected the demands we have made on our board of directors, all of whom have continued to be supportive and effective. And finally, I would like to express my appreciation for the ongoing patience of FairWest's shareholders; I, and all our employees and directors are also proud to be shareholders, and as such are committed to building this company. I believe the solid results of this quarter underline the commitment of our team and the effectiveness of our business and exploitation models. Thank you all."

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)
    FairWest Energy Corporation
    Marion D. Mackie
    Chief Financial Officer
    (403) 264-4949
    (403) 269-1761 (FAX)