Galleon Energy Inc.
TSX : GO

Galleon Energy Inc.

May 25, 2011 22:01 ET

Galleon Energy Inc. Reports Q1 2011 Results

CALGARY, ALBERTA--(Marketwire - May 25, 2011) - Galleon Energy Inc. ("Galleon" or the "Corporation") (TSX:GO) announces Q1 2011 financial results from operations and revised 2011 budget.

Q1 2011 Financial Highlights

  • Revenues (before realized financial derivatives) of $48.0 million ($0.57 per basic share) and funds flow from operations of $26.8 million ($0.32 per basic share) were generated from average production of 13,048 BOE/d (32% oil and liquids and 68% natural gas) in Q1 2011. This compares to revenues (before realized financial derivatives) of $46.0 million ($0.55 per basic share), funds flow from operations of $21.2 million ($0.25 per basic share) and average production of 13,556 BOE/d (29% oil and liquids and 71% natural gas) in Q4 2010;
  • Revenues averaged $44.97/BOE which includes $4.06/BOE from realized commodity financial derivatives. Revenues, including realized commodity financial derivatives, were generated 53% from oil and liquids sales and 47% from natural gas sales;
  • Operating expenses averaged $10.51/BOE;
  • The operating netback was $27.36/BOE and the corporate netback was $22.86/BOE;
  • A net loss of $13.3 million ($0.16 per basic share) was recorded, which included a non-cash unrealized loss from financial derivatives of $19.0 million;
  • The Corporation drilled 16 (13.4 net) wells resulting in 4 (3.8 net) natural gas wells and 12 (9.6 net) oil wells, for a success rate of 100% during the quarter;
  • Capital of $48.1 million was invested in exploration and development activities and proceeds from dispositions net of acquisitions were $0.7 million;
  • Net debt was $173.5 million at March 31, 2011 including $146.0 million drawn on available bank credit facilities of $250 million;
  • At March 31, 2011, issued and outstanding Class A shares were 83,980,083 with share options totaling 7,011,333 with an average exercise price of $5.38.

Q1 2011 Operations Highlights

Eastern Montney Business Unit – Comprised of Eastern Montney Gas/Oil and Culp/McLeans Creek Light Oil

Eastern Montney production averaged 5,178 BOE/d (67% natural gas and 33% oil and NGLs) during the first quarter of 2011, compared to 5,228 BOE/d (78% natural gas and 22% oil and NGL) during the same period in 2010. This business unit contributed 44% to total funds from operating activities in Q1 2011 based on 40% of production volumes. The economics of this area are strong due to the low operating and capital costs, as well as the associated oil and NGLs that are produced with the gas.

The Eastern Montney project was initially developed using vertical wells. As technology evolved to allow effective stimulation of horizontal wellbores, Galleon implemented horizontal development in 2008. To date, Galleon has drilled over 70 horizontal wells and over 80 vertical wells in the project area. The project area encompasses a fairway that is 30 miles long by 10 miles wide that has been mapped and tested. Galleon's approach to this gas project continues to be to pursue a level of drilling activity that would utilize the capacity available in the existing gas plant. This will be the approach until gas prices improve, at which time the project and facilities will be expanded.

During the second half of 2010 Galleon confirmed by drilling 4 wells the presence of significant oil in this Montney fairway. This oil project has been advanced in the first quarter of 2011 with the drilling of four additional Montney oil wells. Galleon plans to continue with the development of this pool over the remainder of 2011. Facility modification and pipeline relicensing is required prior to adding significant new volumes from this project. This work is expected to be completed in September 2011.

A total of 8 (7.9 net) wells were drilled within this business unit in the first quarter of 2011. A total of 6 Montney gas wells, 1 Montney oil well and 1 Cretaceous well are planned for Q2 2011, along with 4 Montney natural gas wells and 4 Montney oil wells in Q3 2011.

Kakut Business Unit – Comprised of Kakut, Senex/Sawn Lake and Edam, Sask.

The Kakut property continues to be a significant development area for Galleon. Production for Q1 2011 averaged 3,812 BOE/d (71% natural gas and 29% oil and NGLs), representing a 15% decrease from 4,486 BOE/d in Q1 2010 (77% natural gas and 23% oil and NGLs). The Kakut business unit contributed 25% of total funds from operating activities based on 29% of production volumes in Q1 2011.

The Kakut Doig light oil/natural gas play is a regional resource that is defined by over 40 vertical wells and occurs at a relatively shallow depth of 1,550 meters. Drilling by Galleon of 27 horizontal wells has confirmed a productive fairway of at least 15 miles in length.

In Q1 2011, Galleon drilled 3 (100%) successful Doig horizontal wells at Kakut. The Corporation plans to continue drilling on this project at a measured pace and to closely monitor results. The evolution of a cost effective drilling and completion technique will assist to determine the optimal depletion strategy. In order to model long-term well-performance expectations there will be a focus in 2011 on developing a reliable reservoir simulation, based upon production and pressure histories, as well as incorporating petrophysical parameters gathered from open-hole logs and core.

Just prior to year end 2010, Galleon received approval from the ERCB for Temporary Net Gas-Oil Ratio Penalty relief in the Kakut Doig B pool for the go forward period of January 1, 2011 to December 31, 2011. This 12 month timeframe will allow Galleon to observe and design the optimal depletion strategy for the pool.

In Q2 2011, Galleon expects to receive down spacing approval for the Kakut Doig on an additional 9 sections, resulting in a total of 20 sections that are approved for 4 horizontal wells per section.

At Sawn Lake, during the first quarter of 2011, 2 non-operated horizontal wells were drilled. Galleon's working interest in these wells is 25%. Early indications are very positive and these two wells are expected to be placed on continuous production during Q3 2011. Several companies operating in the same area have seen prolific results using multi-stage fractures with acid, which is the completion technique that was used in the Galleon wells.

North Peace River Arch Business Unit ("NPRA") – Comprised of various properties, including Eaglesham, Whitelaw, Flood, Dixonville, Alexis/St. Anne, and N.E. BC

Production in the NPRA business unit averaged 4,058 BOE/d in Q1 2011 (66% natural gas and 34% oil and NGLs), a decrease of 9% from the first quarter of 2010 (69% natural gas and 31% oil and NGLs). In Q1 2011, NPRA contributed 31% of the funds from operations and 31% of production volumes.

In this business unit, Galleon has targeted two emerging Triassic oil resource plays. The Corporation has assembled a significant land position over the plays. One vertical well in the first Triassic oil project was recompleted in Q4 2010 along with the drilling of one horizontal test well, both with encouraging results. This activity, along with vertical well control and seismic, provides support for an emerging resource play. This play has considerable aerial extent and thick hydrocarbon charge. Galleon expects to use horizontal drilling technology to develop these opportunities.

Large oil-in-place assets at Alexis/St. Anne continue to be exploited and optimized with horizontal oil wells planned in Q2 and Q3 of 2011. In Q1 2011, in the NPRA business unit, Galleon drilled 2 (1.3 net) horizontal wells targeting Triassic oil both of which were successful.

2011 Outlook/Revised Budget

The 2011 capital expenditure budget, excluding acquisition and dispositions, of between $131 and $140 million remains unchanged from prior guidance. Approximately 70% of the capital program is directed towards oil projects.

Up to 64 wells are planned in 2011 of which 16 wells were drilled in Q1 2011. Beyond Q1 2011, up to 33 wells are planned in the Eastern Montney business unit including up to 16 horizontal light oil wells. Up to a combined 15 wells are planned in the North Peace River Arch and Kakut business units during the last 3 quarters of 2011.

At December 31, 2010, crude oil and liquids production comprised approximately 30% of total production. The 2011 year-end target is to increase crude oil and liquids production to approximately 40% of total production. By December, 2011, approximately 65% of revenues are estimated to be generated from oil and liquids production.

Production for 2011 is forecasted to average 12,641 BOE/d (50.2 Mmcf/d natural gas and 4,278 Bbl/d of crude oil and liquids). The percentage of oil production is expected to increase significantly during the third and fourth quarters as 67% of drilling expenditures in the 2nd through 4th quarters will be spent on oil projects. Based on current hedge contracts and non-hedged commodity prices of $90.00 Cdn WTI and $4.00/Mcf natural gas for the year, Galleon expects to generate cash flow of $1.31 per share.

The increase in oil production is expected to come from 7 projects including Eastern Montney, Culp/Mclean Creek, Kakut Doig, Senex Lake, Alexis/St.Anne and two emerging Triassic oil resource plays in NPRA. Galleon has assembled a significant land position within these oil projects which is expected to fuel the growth of oil production in 2011 and 2012.

Change in Management

Mr. Steve Sugianto has resigned, effective immediately, as President and Chief Executive Officer and a Director of the Corporation. A search committee comprised of Messrs. Glenn Carley, John Brussa and Lanny Fenwick has been constituted to recruit a new President and Chief Executive Officer. The Board of Directors wishes to express their thanks to Mr. Sugianto for his eight years of service to the Corporation.

FINANCIAL AND OPERATING HIGHLIGHTS
Three months ended March 31
($000s except per share and per unit amounts)20112010
Financial
Petroleum and natural gas revenue48,04262,284
Funds flow from operations 126,84231,680
Per share – basic0.320.37
Per share – diluted0.320.37
Net income (loss)(13,297)18,808
Per share – basic(0.16)0.22
Per share – diluted(0.16)0.22
Capital expenditures48,12140,046
Total assets885,2861,010,720
Net debt 1,2173,540252,214
Total non-current financial liabilities10,823-
Shareholders' equity567,529600,610
Weighted average shares outstanding
Basic83,980,08385,098,939
Diluted83,980,08385,098,939
Operating
Average daily production
Light oil (Bbl/d)2,8323,249
Heavy oil (Bbl/d)9481,161
NGLs (Bbl/d)368527
Natural gas (Mcf/d)53,39864,165
Total (BOE/d)13,04815,631
Average selling prices 3
Light oil ($/Bbl)83.1477.47
Heavy oil ($/Bbl)64.0864.91
NGLs ($/Bbl)67.8456.80
Natural gas ($/Mcf)3.985.22
Total (BOE/d)40.9144.28

1 See Advisories
2 Net debt includes bank indebtedness, working capital and financing leases, but excludes financial derivatives
3 The average prices reported are prior to financial derivatives and transportation charges

The 23% decrease in revenue before royalties and financial derivatives in the first quarter of 2011 compared to 2010 was primarily due to decreases in gas prices and production volumes. Average production in Q1 2011 was 13,048 BOE/d compared to 15,631 BOE/d in Q1 2010. The 2,583 BOE per day reduction reflects a decline in natural gas production and the sale of properties, primarily the Puskwa light oil assets sold in the second quarter of 2010.

Excluding volumes from properties which were sold, average daily production for the three months ended March 31, 2011 was 8% lower than the average production recorded in the three months ended March 31, 2010. By product, excluding volumes which were sold, a 20% increase in oil production was offset by a 16% decrease in natural gas production.

The average price for natural gas, before transportation and financial derivative contracts, was $3.98/Mcf in the first three months of 2011, down 24% from $5.22/Mcf in the first three months of 2010. Crude oil prices increased 6% in Q1 2011 compared to Q1 2010 to $78.41/Bbl.

Funds flow from operations decreased by $4.8 million, or 15%, in the first quarter of 2011, compared to the first quarter of 2010. The $9.7 million decrease in petroleum and natural gas revenue net of royalties was partially offset by a $3.3 million increase in realized gains on financial derivative contracts and a $1.2 million reduction in interest expense. The increase in realized gains on financial derivatives reflects higher gains on natural gas derivative contracts.

Net debt at March 31, 2011 was $173.5 million. The $78.7 million reduction from $252.2 million outstanding at March 31, 2010 represents a decrease of 31%. Debt was reduced with the application of proceeds received on the sale of the Puskwa assets during the second quarter of 2010.

The net loss in the first quarter of 2011 includes a $19.0 million unrealized loss on financial derivative contracts, compared to an unrealized gain on financial derivative contacts of $18.5 million in Q1 2010.

Results of Operations

Comparative financial results for the quarter are as follows:

Three months ended March 3120112010
($000s)1,174,344 BOE1,406,752 BOE
$/BOE$/BOE
Petroleum and natural gas revenue48,04240.9162,28444.28
Realized gain on financial derivatives4,7714.061,4351.02
Royalties(9,310)(7.93)(15,281)(10.86)
GCA 13,1712.704,5993.27
Transportation costs(2,200)(1.87)(2,189)(1.56)
Operating costs(12,342)(10.51)(12,487)(8.88)
Net32,13227.3638,36127.27
G&A(3,156)(2.69)(3,568)(2.54)
Interest costs(1,857)(1.58)(3,014)(2.14)
Exploration expenses(215)(0.18)--
Capital and other taxes(62)(0.05)(99)(0.07)
Funds from operations 226,84222.8631,68022.52

1GCA means Gas Cost Allowance
2See Advisories

Crude Oil Prices

Three months ended March 3120112010
$$/Bbl$$/Bbl
Crude oil26,67478.4129,43774.17
Realized financial contracts(1,154)(3.39)(180)(0.45)
Transportation(655)(1.93)(392)(0.99)
Net crude oil24,86573.0928,86572.73

Natural Gas Prices

Three months ended March 3120112010
$$/Mcf$$/Mcf
Natural gas19,1213.9830,1545.22
Realized financial contracts5,9151.231,7750.31
Transportation(1,535)(0.32)(1,797)(0.31)
Net natural gas23,5014.8930,1325.22

NGL Prices

Three months ended March 3120112010
$$/Bbl$$/Bbl
NGL2,24767.842,69356.80
Transportation(10)(0.30)--
Net NGL2,23767.542,69356.80

Performance by Property

Three months ended March 31
20112010
ProductionOperating netbacks/
BOE 1
Funds
from operations2
ProductionOperating netbacks/
BOE1
Funds
from operations2
BOE/d%$%BOE/d%$%
Eastern Montney5,1784022.94445,2283321.6332
Kakut3,8122917.73254,4862921.2027
North Peace River Arch4,0583120.36314,4522919.7124
Sold properties----1,465941.5517
13,04810020.6010015,63110022.83100

1Operating netbacks/BOE exclude GCA and hedging gains and losses, and are calculated by subtracting royalties, operating costs, and transportation from revenues and dividing the result by the average production for the period
2See Advisories

Capital Expenditures

Three months ended March 3120112010
($000s)$%$%
Land8,056172,6977
Geological and geophysical64712821
Drilling and completion34,0127129,76074
Plant and facilities4,868106,10515
Inventory52311,1713
Other assets15-31-
Capital expenditures48,12110040,046100



GALLEON ENERGY INC.
Consolidated Statements of Financial Position
(unaudited)
($000's)





March 31,
2011





December 31,
2010





January 1,
2010
ASSETS
CURRENT
Accounts receivable25,27228,82941,270
Deposits and prepaid expenses3,1093,3616,190
Fair value of financial derivatives16,26120,8154,241
44,64253,00551,701
Property and equipment840,644816,647881,937
Goodwill--25,333
885,286869,652958,971
LIABILITIES
CURRENT
Accounts payable and accrued liabilities55,89649,36955,531
Financing lease--1,545
Bank loan146,025135,682217,243
Other liability--3,775
Fair value of financial derivatives24,9736,41113,789
226,894191,462291,883
Decommissioning liabilities41,03539,94738,228
Fair value of financial derivatives10,82314,980-
Deferred income taxes39,00543,25749,245
317,757289,646379,356
SHAREHOLDERS' EQUITY
Share capital586,626586,626595,559
Contributed surplus41,40140,58130,174
Retained earnings (deficit)(60,498)(47,201)(46,118)
567,529580,006579,615
885,286869,652958,971
GALLEON ENERGY INC.
Consolidated Statements of Earnings (Loss), and Comprehensive Income (Loss)
(unaudited)
Three months ended March 31
($000s, except per share amounts)20112010
REVENUE
Petroleum and natural gas revenue48,04262,284
Royalties, net of GCA(6,139)(10,682)
Realized gain on financial derivatives4,7711,435
Unrealized gain (loss) on financial derivatives(18,959)18,529
Other income123-
27,83871,566
EXPENSES
Operating12,34212,487
Transportation2,2002,189
General and administration3,1563,568
Share-based compensation5991,578
Interest1,8573,014
Exploration expenses215-
Accretion810747
Derecognition expense3,4002,043
Depletion and depreciation20,74619,584
45,32545,210
Earnings (loss) before taxes(17,487)26,356
Income taxes
Capital and other taxes6299
Deferred income taxes (recovery)(4,252)7,449
(4,190)7,548
NET EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS)(13,297)18,808
NET EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS) PER SHARE
Basic(0.16)0.22
Diluted(0.16)0.22
Weighted average Class A shares – basic83,980,08385,098,939
– diluted83,980,08385,098,939

GALLEON ENERGY INC.
Consolidated Statement of Changes in Equity
(unaudited)




($000s)


Share
Capital


Contributed
Surplus

Retained
Earnings (Deficit
)


Total
Balance, January 1, 2010595,55930,174(46,118)579,615
Share-based compensation-6,380-6,380
Options exercised460(123)-337
Shares purchased and cancelled(8,304)4,150-(4,154)
Tax deduction of share issue costs(1,089)--(1,089)
Comprehensive loss--(1,083)(1,083)
Balance, December 31, 2010586,62640,581(47,201)580,006
Share-based compensation-820-820
Comprehensive loss--(13,297)(13,297)
Balance, March 31, 2011586,62641,401(60,498)567,529

GALLEON ENERGY INC.
Consolidated Statement of Changes in Equity
(unaudited)


($000s)
Share
Capital
Contributed
Surplus
Retained
Earnings (Deficit
)Total
Balance, January 1, 2010595,55930,174(46,118)579,615
Share-based compensation-2,239-2,239
Options exercised290(78)-212
Tax deduction of share issue costs(264)--(264)
Comprehensive income--18,80818,808
Balance, March 31, 2010595,58532,335(27,310)600,610
GALLEON ENERGY INC.
Consolidated Statements of Cash Flows
(unaudited)
($000s)Three months ended March 31
20112010
Cash provided by (used in):
OPERATING ACTIVITIES
Net earnings (loss)(13,297)18,808
Items not requiring cash:
Deferred income taxes (recovery)(4,252)7,449
Depletion and depreciation20,74619,584
Derecognition expense3,4002,043
Accretion810747
Share-based compensation5991,578
Other income(123)-
Unrealized loss (gain) on financial derivatives18,959(18,529)
Abandonment costs(81)(235)
Change in non-cash working capital1,1721,555
27,93333,000
FINANCING ACTIVITIES
Issue of common shares-212
Capital lease payments-(203)
Bank loan (repayment)10,34312,308
10,34312,317
INVESTING ACTIVITIES
Additions to property and equipment(48,121)(40,046)
Disposition (acquisition) of oil and gas properties (note 5)681(16,966)
Change in non-cash working capital (note 15)9,16411,695
(38,276)(45,317)
CHANGE IN CASH--
CASH, BEGINNING AND END OF PERIOD--
SUPPLEMENTAL INFORMATION
Cash interest paid1,8473,474
Cash taxes paid62-

Galleon has approximately 84.0 million shares issued and outstanding which trade on the Toronto Stock Exchange under the symbol "GO".

ADVISORIES: Certain information regarding Galleon Energy Inc. in this news release including management's assessment of future plans and operations including development plans, drilling plans timing of completion of facilities, timing of receipt of down spacing approvals, timing of commencement of production from new wells, 2011 capital expenditures and the funding thereof and the nature of expenditures, 2011 target commodity mix and projected 2011 cash flow per share may constitute forward-looking statements under applicable securities laws and necessarily involve risks including, without limitation, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, capital expenditure costs, including drilling, completion and facilities costs, unexpected decline rates in wells, wells not performing as expected, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources. As a consequence, actual results may differ materially from those anticipated in the forward-looking statements. Readers are cautioned that the foregoing list of factors is not exhaustive.

Projected level of 2011 cash flow per share may constitute future oriented financial information or a financial outlook under applicable securities laws, which was approved by management of the Corporation as at May 25, 2011. This is provided to provide readers with expected 2011 cash flow per share based on the various assumptions described. Readers are cautioned that the information may not be appropriate for other purposes.

Additional information on these and other factors that could affect Galleon'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), at Galleon's website (www.galleonenergy.com). Furthermore, the forward-looking statements contained in this news release are made as at the date of this news release and Galleon does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

This news release contains terms commonly used in the oil and gas industry, such as funds flow from operations, funds flow from operations per share, and operating netback. These terms are not defined by GAAP and should not be considered an alternative to, or more meaningful than, cash provided by operating activities or net earnings as determined in accordance with Canadian GAAP as an indicator of Galleon's performance. Management believes that in addition to net earnings, funds flow from operations is a useful financial measurement which assists in demonstrating the Corporation's ability to fund capital expenditures necessary for future growth or to repay debt. Galleon's determination of funds flow from operations may not be comparable to that reported by other companies. All references to funds flow from operations throughout this news release are based on cash flow from operating activities before changes in non-cash working capital and abandonment expenditures. The Corporation calculates funds flow from operations per share by dividing funds flow from operations by the weighted average number of Class A shares outstanding.

Galleon uses the term net debt. This measure does not have any standardized meaning prescribed by Canadian GAAP and therefore may not be comparable to similar measures presented by other companies.

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: 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.

Contact Information

  • Galleon Energy Inc.
    Glenn R. Carley
    Executive Chairman
    (403) 261-6012

    Galleon Energy Inc.
    Shivon Crabtree
    Vice President and Chief Financial Officer
    (403) 261-6012
    www.galleonenergy.com