FairWest Energy Corporation
TSX : FEC

FairWest Energy Corporation

November 14, 2008 18:57 ET

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

CALGARY, ALBERTA--(Marketwire - Nov. 14, 2008) - FairWest Energy Corporation ("FairWest") (TSX:FEC) is pleased to present the financial and operating results for the third quarter ended September 30, 2008. Results include those of FairWest's wholly owned subsidiary Strike Petroleum Ltd. ("Strike"). Revenue from petroleum and natural gas sales for the nine months ended September 30, 2008 increased 225% to $10.6 million compared to $4.7 million during the same period in 2007. In addition, FairWest recorded a gain of 4.2 million as a result of the settlement with Strike's secured lender on August 19, 2008.

Also during the period, the Company improved its debt to cash flow ratio to 3 times cash flow compared to 18 times as of December 31, 2007. As a result of internally generated cash flow, bank financing, settlement with Strike's lender, equity issuance and asset dispositions, working capital deficiency as of September 30, 2008 was 12.5 million, a decrease of $10.6 million compared to December 31, 2007.



A summary of financial results follows.

Nine Months ended September 30,
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2008 2007(1)
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$ $
Revenue
Petroleum and natural gas sales, net of
royalties 10,588,546 4,675,182
Other income 135,200 665,793
Gain on settlement of debt 4,241,869 -
Gain (loss) on disposal of assets 25,469 -
Unrealized gain on financial instrument 165,621 -
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Total revenue 15,156,705 5,340,975
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Expenses
Depletion, depreciation and amortization 10,776,754 5,113,482
Operating 3,708,676 2,052,903
Interest 1,236,255 702,858
General and administrative 1,205,142 1,234,064
Stock-based compensation 244,619 265,128
Part XII.6 tax 95,831 69,965
Write down of asset - 378,958
Future income tax (recovery) (662,074) (1,642,460)
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Total expenses 16,605,203 8,174,898
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Net income (loss) (1,448,498) (2,833,923)
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Funds flow from operations 4,477,842 1,281,185
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Capital expenditures 521,455 30,560,192
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Basic funds flow per share 0.041 0.014
Basic earnings (loss) per share (0.013) (0.031)
Diluted earnings (loss) per share (0.013) (0.031)
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(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 September 30 to meet these goals.

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

We believe that continued execution of our business plan will result in achieving this goal by December 31, 2008. At September 30, 2008 FairWest's debt was 3 times actual annualized cash flow compared to 18 times cash flow at December 31, 2007. As at September 30, 2008 working capital deficiency was $12.5 million, including $12.0 million of revolving bank debt which the Company does not expect to have to pay down within the next 12 months. This is a decrease of $10.6 million from December 31, 2007.

Results achieved to date have given FairWest 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 business 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"). The Credit Facility was used, in part, to pay trade payables, pay out Strike's lender, and to finance exploitation activities. The Credit Facility has an interest rate of prime plus 2.0% and is non-reducing.

- On August 19, 2008 FairWest closed the Settlement Agreement with Strike's secured lender. Under the terms of the Settlement Agreement, FairWest acquired Strike's secured indebtedness from the lender for cash, 5.0 million FairWest Units (the "Units"), and other consideration. Each Unit included one FairWest common share at $0.15 and 1 warrant to purchase 1 common share at $0.20 for a 24 month period. The settlement with Strike's secured lender has resulted in a $4.2 million gain on the Company's income statement.

- During the second quarter, FairWest completed the sale of $2.5 million of producing assets and $1.3 million of non-producing assets. FairWest is marketing a further $3.0 million of producing and non-producing assets in its Provost core area.

- During the third quarter, FairWest raised $1.53 million through the sale of flow through shares. The Board of Directors has approved a private placement offering to sell an additional $0.5 million of equity prior to year end.

- Effective September 30, 2008 FairWest had reached a settlement with 97% of the Strike unsecured arranged creditors who represent $1.2 million of Strike's trade payables. Under the terms of the settlement the Strike unsecured creditors will be repaid by September 30, 2009.

FairWest's 2008 exit debt to projected 2009 cash flow will be less than two (2) times assuming FairWest completes the contemplated 2008 property sales, raises the proposed 2008 equity, and successfully completes the planned capital program in the fourth quarter of 2008 and 2009.

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

Production for the nine month period averaged 748 boe per day and 636 boe per day for the three month period. Production was impacted during the third quarter as a result of several factors, most of which were out of the Company's control. A plant that processes gas from one of our core areas was hit by lightning, shutting in production for two weeks. In Youngstown a third party plant was down due to a pipeline break for about a month. Several of our areas in Provost were shut-in for approximately two weeks due to a major third party transmission line outage. Production was also curtailed for a compressor change in Kirkpatrick Lake. At present, production has returned to its previous production levels and the Company is averaging 725 boe/d.

The Company has planned a capital expenditure program for the balance of 2008 that is capable of achieving a 2008 exit production rate of 1,100 boe/d. The planned exit rate is conditional upon successfully drilling and completing six (6) new wells and closing two (2) proposed acquisitions. In order to finance the capital expenditures, the Company must increase its credit facilities and sell a minimum of $2.5 million of oil and gas assets. In the event that the required capital is not available a portion of the capital expenditure program will be deferred to the first quarter of 2009 and the expected exit rate will not be achieved.



A summary of operational results as of September 30 follows.

Nine Months ended September 30,
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2008 2007 (1)
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Natural gas
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Natural gas sales before royalties($) 9,503,945 4,524,990
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Volume - mcf 1,062,271 662,105
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Volume - mcf/day 3,877 2,425
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$/mcf 8.95 6.83
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Oil and NGLs
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Oil and NGL sales before royalties($) 2,760,334 939,799
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Volume - bbl 28,002 15,032
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Volume - bbl/day 102 55
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$/bbl 98.58 62.52
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Barrel of oil equivalent
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Total sales before royalties($) 12,264,279 5,464,789
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Volume - boe 205,047 125,383
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Volume - boe/day 748 459
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$/boe 59.81 43.58
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(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 85% to natural gas for the nine months ended September 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

As of September 30, 2008 annualized cash flow is $0.055 per share. Management's plan to reach its goal of $0.08 per share by year end was dependent on production volumes being achieved sooner and higher commodity prices. Cash flow of $5.6 million is expected to be generated in 2008.

In order to provide predictable cash flow from our existing production base the Company has entered into marketing hedges. 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.

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

The results for the three month and nine month periods exceeded the Company's target of $30.00 per boe. Operating netbacks for the nine month period have increased to $33.55 per boe at September 30, 2008 from $20.91 per boe during the prior year. This occurred in part due to improved commodity prices. Based on projected production levels and commodity prices in the fourth quarter, the company expects to achieve an overall 2008 netback in excess of $30.00 per boe. During the nine month period, the Company averaged $8.95/mcf compared to $6.83/mcf for natural gas and $98.58/bbl compared to $62.42/bbl for oil and NGLs during the same period in 2007.

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

During the second quarter, FairWest and a related party acquired an oil property for $2.2 million. The same parties are in the process of acquiring a natural gas property for approximately $0.7 million. Both of these acquisitions have and are being done at per unit values that are less than $15.00 per boe. FairWest has presented a $2.1 million offer to purchase 75% of ExploreCo Energy Inc., a related party private oil and gas company of which FairWest currently owns 25%. FairWest's approved fourth quarter 2008 and 2009 drilling and recompletion capital budgets will result in risked finding costs of less than $10.00 per boe.

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

Operating costs for the nine month period ending September 30, 2008 averaged $18.09 per boe. Overall per unit costs were impacted during the period by a temporary decrease in production that was beyond the Company's control. During the fourth quarter and forward, FairWest expects to reduce per unit operating costs to $14.00 through the continuing optimization of a comprehensive cost reduction program in the Company's core operating areas and an increase in production.

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

In the nine month period ended September 30, 2008, general and administrative costs were $5.88 per boe compared to $9.84 in the same period in 2007. Administrative expenses on a per unit basis are higher than planned as a result of decreased production during the quarter. The goal of $5.00 per boe for 2008 is achievable as production improves during the fourth quarter and expected expense recoveries are received.

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 nine months, FairWest recovered $1.0 million of administrative expenses. FairWest has also capitalized $1.4 million of general and administrative expenses.

Operating and Financial Strategy

FairWest's operating and financial strategy involves being the operator of its 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 and financial risks associated with acquisitions and drilling. Property acquisitions and capital projects may be funded by third party syndicates who participate in projects managed by FairWest.

In order to pursue either an acquisition or a drilling project, FairWest must find a third party or parties who do not wish to be the operator and who are 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 that 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 benefits of this joint venture strategy to FairWest are:

1. Accelerated expansion of operated core properties.

2. Joint participation in acquisitions, exploration, development and exploitation with the syndicate.

3. Access to syndicate's undeveloped acreage in FairWest core areas, minimizing exposure to competitive land sales.

4. FairWest is building a source of future production acquisitions which can be acquired based on fair market value.

5. FairWest receives a contribution to its overhead expenses from the managed syndicate.

The above strategy resulted in the formation of a related party private company ExploreCo Energy Inc. ("ExploreCo") in December 2005. ExploreCo holds joint interests with FairWest in the Antelope, Berry Creek and Provost areas of Alberta. FairWest has presented an offer to acquire the 75% of ExploreCo that it does not own for total consideration of $2,112,600 (the "Offer"). The purchase price will be paid through the issuance of FairWest Preferred Shares at a price of $10.00 per share. Each Preferred Share is convertible into 33.33 FairWest common shares at any time after 24 months from the date of issuance. Each Preferred Share is retractable at any time after 24 months from the date of issuance at the option of FairWest or redeemable at any time after 30 months at the option of the ExploreCo shareholder. ExploreCo shareholders will receive a cumulative dividend of 7% per annum. ExploreCo shareholders have until close of business on November 28, 2008 to accept or decline the offer.

Outlook

During the first three quarters of 2008, the resources of the company were directed to reducing its overall debt, conducting a thorough core area review and operations program, acquiring properties, assessing additional potential acquisitions and making preparations for the fourth quarter drilling program. During the last quarter of 2008 FairWest's focus will be on production growth through acquisitions and drilling wells in its core areas to achieve its expected exit rate of 1,100 boe per day. The Company expects that 80% of its fourth quarter production growth will come from drilling and 20% from acquisitions. 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 reduce debt and to create value in east central Alberta. FairWest management has been involved and continues to be involved at investor symposiums in the fall of 2008. This has allowed the Company to 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 detail 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. I am grateful for the support of our lenders and the many service providers that create value for FairWest and therefore our shareholders. 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)
    or
    FairWest Energy Corporation
    Marion D. Mackie
    Chief Financial Officer
    (403) 264-4949
    (403) 269-1761 (FAX)