FairWest Energy Corporation

FairWest Energy Corporation

August 14, 2008 18:06 ET

FairWest Energy Corporation Releases Financial and Operating Results for Second Quarter 2008

CALGARY, ALBERTA--(Marketwire - Aug. 14, 2008) - FairWest Energy Corporation (TSX:FEC) ("FairWest") is pleased to present the financial and operating results for the second quarter ended June 30, 2008. Results include those of FairWest's wholly owned subsidiaries Strike Petroleum Ltd. ("Strike") and Neuberry Limited Partnership ("Neuberry"). Revenues during the period increased 300% as a result of increased production and favourable commodity prices during the period compared to 2007.

A summary of financial results follows.

Six Months ended June 30,
2008 2007(1)
$ $
Petroleum and natural gas sales,
net of royalties 7,538,241 2,506,060
Other income 115,940 31,025
Gain (loss) on disposal of assets 25,626 -
Total revenue 7,679,807 2,537,085
Depletion, depreciation and amortization 6,148,139 2,936,328
Operating 2,586,576 1,048,488
Interest 882,610 277,179
General and administrative 833,571 840,061
Stock-based compensation 170,419 159,062
Part XII.6 tax 68,807 57,038
Future income tax (recovery) (950,825) (1,484,059)
Total expenses 9,739,297 3,834,097
Net income (loss) (2,059,490) (1,297,012)

Funds flow from operations 3,282,617 314,319
Capital expenditures (1,369,286) 23,507,489

Basic funds flow per share 0.030 0.004
Basic earnings (loss) per share (0.021) (0.020)
Diluted earnings (loss) per share (0.021) (0.020)
(1) Includes operations of Strike from May 23, 2007 (39 days).

In our 2007 annual report FairWest established several 2008 operating and financial targets. We are pleased to report on the progress FairWest has made at June 30 to meet these goals.

1. Debt to be Less Than Two Times Projected Cash Flow by June 30, 2008

As of June 30, 2008 debt was 2.4 times projected cash flow. At the end of 2007 FairWest had a consolidated working capital deficiency of $23.2 million and a debt to cash flow ratio of 18.5. FairWest's board of directors approved a comprehensive plan that has reduced the working capital deficiency to $18.9 at June 30, 2008. By September 30, FairWest expects to further reduce the working capital deficiency and have a debt to cash flow ratio of less than 1.5 times projected cash flow. By achieving this result, FairWest will have sufficient liquidity to meet current obligations and the financial flexibility to capitalize on new opportunities as they are presented to the Company. The execution of our plan has involved the following:

- On July 31, 2008 FairWest entered into a new revolving operating demand loan with its lender which has increased its bank line from $4.2 million to a maximum amount of $12.5 million ("Credit Facility"). A total of $10.0 million of the credit facility was available on July 31, 2008 and was used, in part, to pay trade payables with the balance available to finance exploitation activities. The balance of $2.5 million will be available on August 19, 2008 when FairWest pays out Strike's lender. The Credit Facility has an interest rate of prime plus 1.25% and is non-reducing. The provision of these Credit Facilities has resulted in FairWest meeting its working capital ratio of not less than 1.0 as required under the Credit Facility.

- FairWest has entered into a binding agreement ("Settlement Agreement") with Strike's secured lender. Under the terms of the Settlement Agreement, FairWest will acquire Strike's secured indebtedness from the lender for cash, 5.0 million FairWest Units (the "Units"), and other consideration. Each Unit includes one FairWest common share at $0.15 and 1 warrant to purchase one common share at $0.20 for a 24 month period following closing. FairWest has received regulatory approval to issue the Units and has sufficient capital available to close the Settlement Agreement on August 19, 2008.

- the sale of $2.5 million of producing assets and $1.3 million of non-producing assets was completed during second quarter. FairWest is currently marketing a further $3.0 million of non producing assets.

- the sale of $2.75 million of equity has received regulatory approval and is expected to close by the end of August 2008.

- FairWest plans to make a settlement proposal to the Strike unsecured creditors who represent approximately $1.2 million of Strike trade payables by the end of August 2008.

2. Exit 2008 at 1,100 Boe per Day of production

Production for the six month period averaged 805 boe per day, lower than expected due to property sales, and minimal spending on our oil and gas properties during the period. Capital expenditures were delayed until the Credit Facility was available and until the Settlement Agreement had been reached with Strike's lender. On July 31, 2008 FairWest received its Credit Facility and the closing of the Settlement Agreement is scheduled for August 19, 2008.

FairWest has sufficient capital available to achieve 1,100 boe per day by December 31, 2008. The Company expects to spend $5.5 million in the last half of 2008.

By September 30, 178 boe per day of shut in production is expected to be on stream for $600,000. In addition, planned acquisitions, infill wells and recompletions will add additional production. The goal of 1,100 boe per day at December 31, 2008 is achievable.

A summary of operational results as of June 30 follows.

Six Months ended June 30,
2008 2007 (1)
Natural gas
Natural gas sales before royalties($) 6,874,210 2,726,577
Volume - mcf 762,203 366,948
Volume - mcf/day 4,188 2,027
$/mcf 9.02 7.43
Oil and NGLs
Oil and NGL sales before royalties($) 1,860,043 388,119
Volume - bbl 19,488 6,737
Volume - bbl/day 107 37
$/bbl 95.45 57.61
Barrel of oil equivalent
Total sales before royalties($) 8,734,253 3,114,696
Volume - boe 146,522 67,895
Volume - boe/day 805 375
$/boe 59.61 45.88
(1) Includes operations of Strike from May 23, 2007 (39 days).

3. Production weighting to be 80% Natural Gas and 20% Oil and Natural Gas Liquids

Production was weighted 87% to natural gas for the six months ended June 30. FairWest will focus on drilling oil prospects in Provost and liquid rich gas prospects in Berry Creek. FairWest's working interests in the drilling and optimization prospects will be no more than 50% and FairWest will operate all of the programs. The increase in oil drilling activities is expected to result in an 80/20 gas to oil ratio by year end.

4. Cash Flow from Operations to be $0.08 per share or higher by December 31

Cash flow per share for the six months ended June 30 was $0.03 per share. Management's plan to reach its goal of $0.08 per share by year end is dependent on increasing production volumes and favourable commodity prices. Cash flow of $8.0 million is expected to be generated in 2008.

FairWest has hedged 1,000 gigajoules per day ("GJ/d") of natural gas for the period May 2008 to March 2009 at $9.02 per GJ. FairWest has also hedged 500 GJ/d with a floor price of $8.50 per GJ and a ceiling price of $11.75 per GJ for the period May 2008 to March 2009. FairWest also hedged an additional 1,000 GJ/day for year 2009 at $8.00 per GJ and a ceiling price of $8.30 per GJ. This will provide predictable cash flow from our existing production base.

5. Production Operating Netback to be $30.00 per Boe for 2nd Half of 2008

Operating netbacks have increased from $21.48 per boe at June 30, 2007 to $33.80 per boe at June 30, 2008. This occurred as a result of commodity price increases during the first half of 2008. For the month of June 2008 operating netbacks were $44.39 as a result of increased commodity prices and reduced operating costs.

6. Acquisition, Finding and Development Costs to be $15.00 per Boe or Less

To date in 2008, FairWest has acquired one oil and gas property for $2.5 million and is in the process of acquiring a second property for total acquisition costs of $3.0 million. The per unit cost of these acquisitions is less than $10.00 per barrel of oil equivalent which is well below our target of $15.00 per boe. FairWest expects to retain a minimum of 50% of the assets acquired. FairWest's approved drilling and recompletion capital budget will result in finding costs that are less than $10.00 per barrel of oil equivalent.

7. Operating Costs to be $14.00 per Boe for the Last Half of 2008

Operating costs for the three month period ending June 30 averaged $15.56 per boe. Overall costs were impacted during the period by high operating costs of $24.73 per boe on the Strike properties. On a go forward basis, FairWest expects to reduce per unit operating costs for the second half of 2008 to $14.00 through the optimization of compression facilities and pipeline gathering facilities on the Strike properties. FairWest will continue with the implementation of a comprehensive cost reduction program in FairWest's core operating areas by utilizing FairWest field contractors to perform the work that was formerly done by third parties.

8. General and Administrative expenses to be $5.00 per Boe for 2008

General and administrative expenses averaged $5.69 per boe for the six months and $4.25 per boe for the three months ended June 30. FairWest recovers a portion of its general and administrative expenses from related party limited partnerships and from overhead recovered as a result of being the operator of its oil and gas properties. During the second quarter, FairWest received $250,000 of administrative fees from a related party. The goal of $5.00 per boe for 2008 is achievable as production continues to grow and we continue to implement our financial strategy.

Operating and Financial Strategy

FairWest's operating and financial strategy involves being the operator of it core properties and holding up to a 50% working interest position in these properties. Being the operator allows FairWest to manage its production base on a timely basis and hence effectively manage the operational risks associated with the business. By holding a working interest of up to 50%, FairWest is able to maintain operatorship and reduce its financial risk to each project that it holds or plans to acquire either through an acquisition or drilling.

In order to pursue either an acquisition or a drilling project, FairWest must find a third party or parties who does not wish to be the operator and who is prepared to assume the risks associated with a 50% working interest position. Accordingly, an essential part of FairWest's business strategy is to create related private companies and limited partnerships who are prepared to acquire oil and gas properties from FairWest and jointly participate with FairWest in exploitation, drilling operations and acquisitions. In the case of the private companies, FairWest holds a 25% equity interest in the private company. In the case of the limited partnerships, FairWest does not hold any interest in the general partner of the limited partnership. FairWest provides management services to the related companies and partnerships and allocates a portion of its corporate overhead expenses to these parties. After two years from formation of the company or partnership, FairWest has a right to make an offer to acquire its interest at fair market value.

The above strategy resulted in the formation of a related party private company ExploreCo Energy Inc. ("ExploreCo") in December 2005 prior to September 30, 2008. FairWest plans to make an offer to acquire the ExploreCo common shares that it does not own based on fair market value at March 31, 2008. ExploreCo shareholders have the right to accept or decline the offer.

FairWest and a related limited partnership have acquired $2,500,000 of oil and gas assets in the Provost area during the first half of 2008 and expect to acquire a further $500,000 of natural gas assets in the Provost area. In October 2008, FairWest will acquire oil and gas assets in Berry Creek.

What are the benefits of this strategy to FairWest?

1. FairWest has access to low risk undeveloped acreage associated with acquisitions in its core areas and minimizes the company's exposure to competitive land sales.

2. FairWest can compete in the acquisition market at this stage of its growth in its core areas without issuing equity and taking on more debt.

3. FairWest is building a source of production acquisitions at hand which after a two year period can be acquired based on fair market value.

4. FairWest will receive a contribution to its overhead expenses from the limited partnerships.


During the first half of 2008, minimal capital was spent on its oil and gas assets and the resources of the company were directed to reducing its overall debt and conducting a thorough core area review and operations program. During the last half of 2008 FairWest's focus will be on production growth from its core areas to exit 2008 at 1,100 barrels of oil equivalent. FairWest will direct the majority of its capital toward drilling low risk oil and gas prospects on its core lands with a recycle ratio of greater than 2 times. FairWest will continue to look for acquisitions in its core areas and possibly new core areas that will provide inventory for well and facility optimization as well as drilling opportunities.

FairWest's management and directors are motivated as shareholders to improve stock performance. The stock trades at a significant discount to net asset value. Your team has demonstrated the unique ability and experience to create value in east central Alberta. FairWest management intends to promote FairWest at investor symposiums in the fall of 2008 and communicate the strategies and the successful implementation of these strategies to the investment community.

I would like to thank our employees and consultants for their dedication and attention to details as they continue to generate value for shareholders from inventory under our core properties. I would also like to thank our Board of Directors for their wise counsel and the time spent on the many committees necessary to effectively manage a public company. And lastly I would like to thank our shareholders for their loyalty to 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.

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)