Galleon Energy Inc.
TSX : GO

Galleon Energy Inc.

November 11, 2010 20:35 ET

Galleon Energy Inc. Reports Third Quarter 2010 Financial Results and 2011 Guidance

CALGARY, ALBERTA--(Marketwire - Nov. 11, 2010) - Galleon Energy Inc. (TSX:GO) ("Galleon" or the "Corporation") announces third quarter 2010 financial results and 2011 guidance. Additional information including unaudited consolidated financial statements, notes and management's discussion and analysis may be viewed at www.galleonenergy.com or www.SEDAR.com.

THIRD QUARTER 2010 HIGHLIGHTS

- Drilled and cased for production 17 (16.1 net) wells in Q3 2010 resulting in 6 (5.4 net) natural gas wells and 11 (10.7 net) oil wells, for a success rate of 100%;

- Revenues of $44.3 million ($0.52/share) and funds flow from operations of $20.4 million ($0.24/share) were generated from average production of 13,823 BOE/d (71% gas and 29% oil and NGLs);

- Operating expenses averaged $10.20/BOE of which $0.30/BOE related to gas plant turnaround costs, and the operating netback was $20.70/BOE;

- Exploration and development capital expenditures of $40.7 million were incurred;

- At September 30, 2010, net debt was $139.7 million comprised of $122.3 million in bank debt and a working capital deficiency of $17.4 million. Credit facilities of $250 million are available to the Corporation.

- In accordance with the Corporation's on-going goal of value generation through strategically farming out lands from its extensive land base and prospect inventory, the Corporation entered into 3 farm-out deals. Two wells have been drilled and 4 re-entry wells have been completed.

As previously announced, Galleon completed the sale of the majority of its interests in the Puskwa property on June 25, 2010 to a third party. Q3 2010 average production was 6% higher than average production recorded in Q3 2009 after adjusting for production volumes from the sold assets.

To September 30, 2010 revenues of $161.8 million ($1.90 per share) and funds flow from operations of $79.3 million ($0.93 per share) were generated from 15,219 BOE/d (70% natural gas and 30% oil and NGLs). Operating expenses have averaged $9.34/BOE in 2010. Earnings of $9.2 million ($0.11 per share) were recorded in 2010.

Second half 2010 production is expected to average 14,000 BOE/d. Currently, there are 2 rigs drilling. Year end net debt is expected to be approximately $132 to $147 million, dependent upon the closing of a negotiated minor asset sale, with forecasted operating costs in the second half of 2010 to be less than $10.00/BOE.

2011 Guidance

In the second half of 2010, the Corporation has been focused on directing capital resources towards developing lands to which proven and probable undeveloped reserves have been assigned and converting those reserves into production and cash flow. This strategy will continue throughout 2011.

Galleon's board of directors has approved a 2011 capital expenditure budget of up to $131 million. This 2011 capital expenditure budget is expected to be allocated 80% towards low risk development locations in the Eastern Montney natural gas, Doig light oil and North Peace River arch producing areas. Approximately 70% of the capital program is directed towards oil projects. Funding of the 2011 capital program is expected to be largely financed from internal cash flow.

In July, 2010, the Corporation was restructured into three business units: Eastern Montney, Kakut and North Peace River Arch ("NPRA"). In 2011, approximately 31% of investment capital will be allocated to the Eastern Montney business unit, 45% to the Kakut business unit and 24% to the NPRA business unit.

In 2011, the Corporation will continue to farm out lands, some of which are prospective for emerging resource plays including those in the Nordegg, Duvernay and Slave Point. The goal will be to have third parties fund and prove up the potential of the lands while retaining a significant portion of the net resource. A number of opportunities have been identified on Galleon's land base of approximately 795,000 net acres.

Production in 2011 is expected to average 14,500 BOE/d (31% oil, 3% liquids and 66% natural gas). The percentage of oil and NGLs is expected to increase from 29% in the third quarter of 2010 to 34% on average for 2011, with a fourth quarter exit of 35%. Oil and NGLs revenues are expected to represent 60% of gross revenues.

Projected 2011 cash flows are approximately 20% higher than cash flows forecasted in 2010. Operating costs in 2011 are expected to average $10.00/BOE and royalties, net of gas cost allowance, are budgeted to be less than 15% of revenues. Cash flow is estimated to be approximately $1.50 per basic share. At December 31, 2011, the Corporation estimates a net debt to cash flow ratio of less than 1.2.

Galleon has used average commodity price assumptions of $85/Bbl USD WTI for oil and $3.70/GJ CDN for natural gas in the 2011 corporate budget. A foreign exchange rate of $0.97 has been used. For 2011, the Corporation has commodity hedge contracts in place for 33.3 Mmcf/d of natural gas with an average fixed price of $5.71/Mcf and 2,500 Bbl/d of crude oil with an average price of $82.90/Bbl WTI Cdn.



FINANCIAL AND OPERATING HIGHLIGHTS

Three months ended Nine months ended
($000s except per share September 30 September 30
and per unit amounts) 2010 2009 2010 2009
----------------------------------------------------------------------------
Financial
Revenue before royalties and
financial derivatives 44,279 49,497 161,836 156,857

Funds flow from operations (1) 20,425 18,818 79,251 74,573
Per share - basic 0.24 0.23 0.93 0.96
Per share - diluted 0.24 0.23 0.93 0.96

Net income (loss) (5,621) (1,815) 9,198 (28,918)
Per share - basic (0.07) (0.02) 0.11 (0.37)
Per share - diluted (0.07) (0.02) 0.11 (0.37)

Capital expenditures -
exploration & development 40,746 30,035 102,409 80,045
Total assets 1,026,875 1,127,665 1,026,875 1,127,665
Net debt (1) (2) 139,732 242,056 139,732 242,056
Shareholders' equity 717,196 701,054 717,196 701,054

Weighted average shares
outstanding
Basic 84,869,236 82,890,883 85,036,467 78,082,486
Diluted 84,869,236 82,890,883 85,048,031 78,082,486

Operating
Average daily production
Light oil (Bbl/d) 2,517 3,872 3,018 4,112
Heavy oil (Bbl/d) 1,009 1,281 1,092 1,235
NGLs (Bbl/d) 433 561 499 604
Natural gas (Mcf/d) 59,186 57,012 63,662 62,746
Total (BOE/d) 13,823 15,216 15,219 16,409

Average selling prices (3)
Light oil ($/Bbl) 71.26 67.12 73.94 58.27
Heavy oil ($/Bbl) 58.13 57.27 60.42 47.68
NGLs ($/Bbl) 49.48 43.87 53.40 38.75
Natural gas ($/Mcf) 3.75 3.16 4.35 4.03
Total ($/BOE) 34.82 35.36 38.95 35.01

----------------------------------------------------------------------------
(1) See "Non-GAAP Measurements"
(2) Net debt includes bank indebtedness, working capital and capital
leases, but excludes financial derivatives
(3) The average prices reported are before realized derivatives and
transportation charges


Results of Operations
Comparative financial results for the quarter are as follows:

Three months ended September 30 2010 2009
----------------------------------------------------------------------------
($000s) 1,271,739 BOE $/BOE 1,399,847 BOE $/BOE
----------------------------------------------------------------------------
Revenues 44,279 34.82 49,497 35.36
Realized gain on
financial derivatives 2,420 1.90 699 0.50
Other income - - 6 -
Royalties (8,293) (6.52) (13,489) (9.64)
GCA (1) 3,013 2.36 3,549 2.54
Transportation costs (2,110) (1.66) (1,970) (1.41)
Operating costs (12,978) (10.20) (13,045) (9.32)
----------------------------------------------------------------------------
Net 26,331 20.70 25,247 18.03
G&A (3,930) (3.09) (3,453) (2.47)
Restructuring costs (59) (0.05) - -
Interest costs (1,849) (1.45) (2,876) (2.05)
Capital and other taxes (68) (0.05) (100) (0.07)
----------------------------------------------------------------------------
Funds from operations (2) 20,425 16.06 18,818 13.44
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Nine months ended September 30 2010 2009
----------------------------------------------------------------------------
($000s) 4,154,746 BOE $/BOE 4,479,748 BOE $/BOE
----------------------------------------------------------------------------
Revenues 161,836 38.95 156,857 35.01
Realized gain on
financial derivatives 9,184 2.21 8,810 1.97
Other income - - 752 0.17
Royalties (35,505) (8.54) (40,626) (9.07)
GCA (1) 9,628 2.32 17,251 3.85
Transportation costs (6,721) (1.62) (6,368) (1.42)
Operating costs (38,793) (9.34) (44,132) (9.85)
----------------------------------------------------------------------------
Net 99,629 23.98 92,544 20.66
G&A (10,561) (2.54) (11,481) (2.56)
Restructuring costs (1,242) (0.30) - -
Interest costs (8,441) (2.03) (6,163) (1.38)
Capital and other taxes (134) (0.04) (327) (0.07)
----------------------------------------------------------------------------
Funds from operations (2) 79,251 19.07 74,573 16.65
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(1) GCA means Gas Cost Allowance
(2) See "Non-GAAP Measurements"


Petroleum and Natural Gas Revenues
Three months ended September 30 2010 2009
----------------------------------------------------------------------------
($000s) % %
Light oil 16,417 37 23,884 48
Heavy oil 5,397 12 6,733 14
NGLs 1,971 5 2,266 4
Natural gas 20,427 46 16,654 34
Royalty income 67 - (40) -
----------------------------------------------------------------------------
Total 44,279 100 49,497 100
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Nine months ended September 30 2010 2009
----------------------------------------------------------------------------
($000s) % %
Light oil 60,668 38 65,272 42
Heavy oil 18,016 11 16,049 10
NGLs 7,275 4 6,387 4
Natural gas 75,503 47 68,859 44
Royalty income 374 - 290 -
----------------------------------------------------------------------------
Total 161,836 100 156,857 100
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Revenues for the three months ended September 30, 2010 decreased by 11%, to $44.3 million from $49.5 million for the same period in 2009. Gas revenues increased in Q3 2010 due to increases in both production volumes and natural gas prices. The increase in oil prices during the third quarter of 2010 was more than offset by a decrease in production volumes resulting from the sale of properties, primarily the Puskwa light oil properties sold in Q2 2010.



Production

Three months ended Nine months ended
September 30 September 30
2010 2009 2010 2009
----------------------------------------------------------------------------
% % % %
Light oil (Bbls/d) 2,517 18 3,872 26 3,018 20 4,112 25
Heavy oil (Bbls/d) 1,009 7 1,281 8 1,092 7 1,235 8
NGLs (Bbls/d) 433 3 561 4 499 3 604 3
Natural gas (Mcf/d) 59,186 72 57,012 62 63,662 70 62,746 64
----------------------------------------------------------------------------
BOE/d (6:1) 13,823 100 15,216 100 15,219 100 16,409 100
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Average production was 13,823 BOE/d for the third quarter of 2010, 9% lower than the average production of 15,216 BOE/d for the third quarter of 2009. Daily production volumes varied by product as follows: light oil decreased by 35%; heavy oil decreased by 21%; natural gas liquids decreased by 23% and natural gas increased by 4%.

After excluding properties which were sold prior to Q3 2010, average production for the three months ended September 30, 2010 was 6% higher than the average production recorded in Q3 2009.

Commodity Pricing and Marketing

Petroleum products are sold to major Canadian marketers at spot reference prices or prices subject to commodity contracts based on US WTI for crude oil and AECO for natural gas. As a means of managing the risk of commodity price volatility, Galleon has entered into several natural gas and crude oil financial contracts.



The Corporation has the following financial contracts in place as at
September 30, 2010:

Natural Gas:
----------------------------------------------------------------------------
January 1, 2010 - December 31, 2011 5,000 GJ/d CDN $5.85/GJ
January 1, 2010 - December 31, 2011 5,000 GJ/d CDN $5.75/GJ
April 1, 2010 - March 31, 2011 5,000 GJ/d CDN $5.76/GJ
January 1, 2011 - December 31, 2011 20,000 GJ/d CDN $5.20/GJ

Crude Oil:
----------------------------------------------------------------------------
Fixed Price:
January 1, 2010 - December 31, 2010 500 Bbl/d WTI CDN $74.30/Bbl
January 1, 2010 - December 31, 2010 500 Bbl/d WTI CDN $76.50/Bbl
January 1, 2010 - December 31, 2010 500 Bbl/d WTI CDN $74.50/Bbl
January 1, 2010 - December 31, 2010 500 Bbl/d WTI CDN $77.00/Bbl
January 1, 2011 - December 31, 2011 500 Bbl/d WTI CDN $92.00/Bbl
January 1, 2011 - December 31, 2011 1,000 Bbl/d WTI CDN $84.15/Bbl

Costless Collars:
January 1, 2010 - December 31, 2010 500 Bbl/d WTI CDN $75.00-$94.00/Bbl
January 1, 2010 - December 31, 2010 500 Bbl/d WTI CDN $75.00-$95.00/Bbl
January 1, 2011 - December 31, 2011 1,000 Bbl/d WTI CDN $77.10-$90.00/Bbl

Other:
January 1, 2012 - December 31, 2012 1,000 Bbl/d WTI US $85.00 Call
January 1, 2012 - December 31, 2012 1,100 Bbl/d WTI US$ 85.00 Swaption

Interest Rate Swap:
----------------------------------------------------------------------------
Notional Amount CAD $100 million Term: January 20, 2009 - January 20, 2011

Fixed rate 1.1% - Floating rate is reset against CAD--CDOR on each 3 month
anniversary


In the third quarter of 2010, Galleon recorded realized gains of $2.4 million on these financial contracts, compared to a $0.7 million gain realized in the third quarter of 2009.

Based on the mark to market value at September 30, 2010, an unrealized gain on financial contracts of $0.4 million was recorded in the third quarter of 2010, compared to an unrealized gain of $13.3 million in Q3 2009.



Subsequent to September 30, 2010, the Corporation entered into the
following financial contracts:

Natural Gas:
April 1, 2011 - December 31, 2011 5,000 GJ/d CDN $5.60/GJ

Crude Oil:
January 1, 2012 - December 31, 2012 527 Bbl/d WTI US$85.00/Bbl Call


Crude Oil Prices

Three months ended September 30 2010 2009
$000s $/Bbl $000s $/Bbl
----------------------------------------------------------------------------
Crude oil 21,898 67.50 30,655 64.67
Realized financial contracts (661) (2.04) (2,220) (4.68)
Transportation (491) (1.51) (478) (1.01)
----------------------------------------------------------------------------
Net crude oil 20,746 63.95 27,957 58.98
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Nine months ended September 30 2010 2009
$000s $/Bbl $000s $/Bbl
----------------------------------------------------------------------------
Crude oil 78,911 70.33 81,496 55.82
Realized financial contracts (1,846) (1.65) (2,742) (1.88)
Transportation (1,433) (1.28) (1,579) (1.08)
----------------------------------------------------------------------------
Net crude oil 75,632 67.40 77,175 52.86
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Natural Gas Prices
Three months ended September 30 2010 2009
$000s $/Mcf $000s $/Mcf
----------------------------------------------------------------------------
Natural gas 20,410 3.75 16,576 3.16
Realized financial contracts 3,119 0.57 3,074 0.59
Transportation (1,615) (0.30) (1,413) (0.27)
----------------------------------------------------------------------------
Net natural gas 21,914 4.02 18,237 3.48
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Nine months ended September 30 2010 2009
$000s $/Mcf $000s $/Mcf
----------------------------------------------------------------------------
Natural gas 75,650 4.35 68,974 4.03
Realized financial contracts 11,345 0.65 11,794 0.69
Transportation (5,283) (0.30) (4,710) (0.27)
----------------------------------------------------------------------------
Net natural gas 81,712 4.70 76,058 4.45
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Performance by Property
Three months ended September 30

2010 2009 2010
------------------------------------------ ----------------------
Funds
Operating Operating from
netbacks/ netbacks/ operations
Production BOE (1) Production BOE(1) (2)
----------------------------------------------------------------------------
BOE/d % $ BOE/d % $ %

Eastern
Montney 5,524 40 20.93 4,565 30 13.91 51
Kakut 3,890 28 16.63 3,150 21 14.72 29
North Peace
River Arch 4,409 32 9.99 5,283 35 8.82 20
Sold properties - - - 2,218 14 31.88 -
----------------------------------------------------------------------------
13,823 100 16.26 15,216 100 14.93 100
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Nine months ended September 30

2010 2009
----------------------------------------------------------------------------
2010
Funds
Operating Operating from
netbacks/ netbacks/ operations
Production BOE (1) Production BOE(1) 2
----------------------------------------------------------------------------
BOE/d % $ BOE/d % $ %
Eastern
Montney 5,459 36 19.93 5,011 31 14.13 37
Kakut 4,233 28 19.14 3,278 20 13.45 28
North Peace
River Arch 4,550 30 15.12 5,658 34 10.32 23
Sold properties 977 6 36.98 2,462 15 27.33 12
----------------------------------------------------------------------------
15,219 100 19.37 16,409 100 14.67 100
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(1) Operating netbacks/BOE excludes GCA and hedging gains and losses, and
are calculated by subtracting royalties and operating costs from
revenues.
(2) See "Non-GAAP Measurements".


The Corporation has been structured into three business units: Eastern Montney, North Peace River Arch and Kakut. These business units, and the general nature of the activities planned within each, are described as follows:

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

Eastern Montney production averaged 5,524 BOE/d (70% natural gas and 30% oil and NGLs) during Q3 2010, which was 21% higher than the average production during Q3 2009. The Eastern Montney natural gas project continues to represent a significant resource to Galleon and is the largest producing area, contributing 51% to total funds from operating activities in Q3 2010 based on 40% of production volumes.

Galleon has been developing the Eastern Montney project for over five years. Horizontal development began more than two years ago. To end of Q3 2010, Galleon has drilled a total of 57 horizontal wells and 83 vertical wells in the project area. The project area encompasses a fairway extending 30 miles long by 10 miles wide that has been mapped and tested. The current strategy is to increase proved producing reserves by drilling the large inventory of undeveloped locations. Given current gas prices, Galleon plans to drill just enough wells into the Montney gas project to utilize the capacity that exists in its gas plant.

A total of 4 (3.9 net) Eastern Montney horizontal gas wells, and 2 (2.0 net) additional oil wells were drilled within this business unit during Q3 2010.

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

The Kakut property continues to be a significant growth area for Galleon. Production for Q3 2010 averaged 3,890 BOE/d (74% natural gas and 26% oil and NGLs) which represents an increase of 23% from Q3 2009. The Kakut property contributed 29% of total funds from operating activities based on 28% of production volumes in Q3 2010.

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 metres. Drilling has confirmed a productive fairway of at least 15 miles in length.

Galleon completed the Kakut battery expansion in late August, 2010, in anticipation of continued growth in both oil and gas production. The expansion has increased fluid handling capacity from 1,000 to 10,000 barrels per day. Galleon's Kakut gas plant capacity is 28 Mmcf/d.

To the end of the third quarter, Galleon had drilled 19 Doig horizontal wells at Kakut. The Company plans to continue drilling on this project at a measured pace, and to continue to closely monitor results. This project is in its early-stages and long-term well-performance expectations will be refined over time.

After June 30, 2010, two wells, 04-28-74-03W6 and 16-06-75-03W6 (both 100% working interest), which were producing a total of approximately 900 BOE/d (83% natural gas and 17% oil and NGLs) were shut in due to high gas-oil ratios (GOR's), after their four month new oil well production period (NOWPP) came to an end. Galleon has submitted applications to the ERCB for these two wells, which, if granted, would result in the two wells being placed back on production at optimal rates.

During the third quarter, Galleon received approval for the remaining Kakut Doig holding applications outstanding. This brings the total to 11 sections which are approved for 4 horizontal wells per section.

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

Production at NPRA in Q3 2010 averaged 4,409 BOE/d (71% natural gas and 29% oil and NGLs), a decrease of 17% from Q3 2009. In Q3 2010, NPRA contributed 20% of the funds from operations and 32% of production volumes.

In this business unit, Galleon has various new projects primarily targeting light oil. The Company has also identified natural gas opportunities here, which will be pursued as priorities warrant. In general, horizontal drilling technology will be used to develop these opportunities. Much of the Company's activity here will target Montney oil plays that are analogous to the Grimshaw Triassic D pool which has seen substantial horizontal drilling activity over the past year. Large oil-in-place assets at Alexis/St. Anne will also continue to be exploited and optimized.

In Q3 2010, Galleon drilled 1 (0.7 net) Montney horizontal oil well, and 1 (0.8 net) vertical gas well in the NPRA area.



Royalties

Three months ended September 30 2010 2009
----------------------------------------------------------------------------
($000s, except as indicated)
Crown 6,478 11,710
Freehold 996 709
GORR and other 819 1,070
----------------------------------------------------------------------------
Gross royalties 8,293 13,489
GCA (3,013) (3,549)
----------------------------------------------------------------------------
Net royalties 5,280 9,940
----------------------------------------------------------------------------
----------------------------------------------------------------------------
% of revenue 18.7 27.3
% of revenue net of GCA 11.9 20.1

Nine months ended September 30 2010 2009
----------------------------------------------------------------------------
($000s, except as indicated)
Crown 28,994 35,313
Freehold 3,397 1,958
GORR and other 3,114 3,355
---------------------------------------------------------------------------
Gross royalties 35,505 40,626
GCA (9,628) (17,251)
----------------------------------------------------------------------------
Net royalties 25,877 23,375
----------------------------------------------------------------------------
----------------------------------------------------------------------------
% of revenue 21.9 25.9
% of revenue net of GCA 16.0 14.9


Gross royalties were 18.7% for the third quarter of 2010, compared to 27.3% for the same period in 2009. By product the gross royalty rates were 22.9% for heavy oil, 15.7% for light oil, 19.0% for natural gas and 30.3% for liquids for Q3 2010. For the third quarter of 2009, the royalty rates were 21.4% for heavy oil, 30.2% for light oil, 22.4% for natural gas and 34.0% for liquids.
Net royalties were 11.9% for the third quarter of 2010 compared to 20.1% for the same period in 2009.

The gross royalty rate for light oil decreased in Q3 2010, compared to Q3 2009, reflecting the sale of higher royalty rate properties and royalty rate reductions applicable to production from new wells.
Under the Drilling Royalty Credit ("DRC") incentive program, the Alberta Government will apply up to $200 per metre for wells spud during the period April 1, 2009 to March 31, 2011 against net Crown royalties payable. As at September 30, 2010, the Corporation had recorded drilling credits of $18.9 million as a reduction of property and equipment.



Operating Costs
Three months ended September 30

2010 2009
----------------------------------------------------------------------------
Production Operating Costs Production Operating Costs
----------------------------------------------------------------------------
% % $/BOE % % $/BOE

Eastern Montney 40 34 8.75 30 28 8.75
Kakut 28 21 7.68 21 17 7.58
North Peace River
Arch 32 45 14.23 35 45 12.16
Sold properties - - - 14 10 6.19
----------------------------------------------------------------------------
100 100 10.20 100 100 9.32
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Nine months ended September 30

2010 2009
----------------------------------------------------------------------------
Production Operating Costs Production Operating Costs
----------------------------------------------------------------------------
% % $/BOE % % $/BOE

Eastern Montney 36 35 9.02 31 31 9.87
Kakut 28 22 7.55 20 17 8.76
North Peace River
Arch 30 39 12.24 34 42 11.93
Sold properties 6 4 5.31 15 10 6.48
----------------------------------------------------------------------------
100 100 9.34 100 100 9.85
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Operating costs were $10.20/BOE for the third quarter of 2010, an increase of 9% from $9.32/BOE for the same period of the prior year, influenced in part by the sale of Puskwa which was a lower operating cost property. Approximately $0.30/BOE of this increase relates to a one-time turnaround cost incurred in Q3 2010 at Donnelly and Eaglesham.

In the Eastern Montney natural gas project, quarterly operating costs were consistent year over year at $8.75/BOE.

Operating costs at Kakut were $7.68/BOE in Q3 2010, an increase of 1% from $7.58/BOE in the same period of the prior year.

Operating costs at NPRA were $14.23/BOE in third quarter 2010, compared to $12.16/BOE in the same period of 2009. The 17% increase in operating costs per BOE was a function of lower production volumes.



General and Administration Expenses
Three months ended September 30 2010 2009
----------------------------------------------------------------------------
($000s) $/BOE $/BOE

Gross 5,323 4.18 4,645 3.32
Capitalized overhead (1,021) (0.80) (784) (0.56)
Overhead recoveries (372) (0.29) (408) (0.29)
----------------------------------------------------------------------------

3,930 3.09 3,453 2.47
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Nine months ended September 30 2010 2009
----------------------------------------------------------------------------
($000s) $/BOE $/BOE

Gross 14,504 3.49 15,136 3.38
Capitalized overhead (2,515) (0.61) (2,238) (0.50)
Overhead recoveries (1,428) (0.34) (1,417) (0.32)
----------------------------------------------------------------------------

10,561 2.54 11,481 2.56
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Gross G&A expenses increased by $0.7 million or 15% in Q3 2010 from Q3 2009, due primarily to higher employee expenses.

For the three months ended September 30, 2010 G&A expenses by category were: salary and employee - 66%, office - 18%, consulting - 5%, computer - 5%, shareholder costs - 1%, audit, engineering and legal - 3%, and corporate - 2%.

Restructuring Costs

In March 2010 the Board of Directors initiated a process to identify and consider strategic alternatives, with a view to enhancing shareholder value. The strategic review process was completed in July 2010. To increase balance sheet strength to give the Corporation the flexibility to execute the operational plan, assets in the Puskwa area of Alberta were sold for cash consideration, net of adjustments, of $131.5 million in the second quarter of 2010. In conjunction with the asset sale, Galleon restructured its technical and operational teams. Expenses of $1.2 million related to the restructuring process were incurred in the nine months ended September 30, 2010.



Capital Expenditures
($000s)
----------------------------------------------------------------------------
Property & equipment balance at December 31, 2009 1,041,140
Additions to property and equipment 102,409
Dispositions of property and equipment (132,012)
Acquisitions of property and equipment 17,650
Asset retirement obligation additions 568
Asset retirement obligation disposed (1,839)
Depletion, depreciation and other (93,071)
----------------------------------------------------------------------------
Property & equipment balance at September 30, 2010 934,845
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Three months ended September 30 2010 2009
----------------------------------------------------------------------------
($000s) % %
Land 1,854 5 791 3
Geological and geophysical 660 2 281 1
Drilling and completion 30,369 74 15,974 53
Plant and facilities 7,815 19 12,816 43
Other assets 48 - 11 -
----------------------------------------------------------------------------
Exploration and development
expenditures 40,746 100 29,873 100
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Nine months ended September 30 2010 2009
----------------------------------------------------------------------------
($000s) % %
Land 6,028 6 2,150 3
Geological and geophysical 1,191 1 1,680 2
Drilling and completion 77,045 75 48,375 61
Plant and facilities 18,066 18 27,554 34
Other assets 79 - 56 -
----------------------------------------------------------------------------
Exploration and development
expenditures 102,409 100 79,815 100
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Exploration and development expenditures during Q3 2010 totalled $40.7 million. Drilling and completion operations accounted for $30.4 million, equipment and facility expenditures were $7.8 million and $2.5 million was spent on land and seismic.

During the third quarter of 2010, the Galleon drilled and cased 17 (16.1 net) wells.

In late August 2010, the Corporation expanded fluid capacity at the Kakut oil battery. This will allow up to 10,000 barrels of fluid per day to be processed at this facility which serves the Kakut Doig light oil project.

The final payment required under the equipment lease financing arrangement was made during the three months ended September 30, 2010.



Liquidity and Capital Resources
September 30 2010 2009
----------------------------------------------------------------------------
($000s)
Bank debt 122,283 230,799
Working capital deficiency (1) 17,449 11,257
----------------------------------------------------------------------------
Total net debt 139,732 242,056
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Excludes future income taxes and fair value of financial derivatives


The Corporation has $250 million in credit facilities available consisting of a $225 million extendible 364 day revolving term facility and a $25 million non-revolving facility. The $25 million facility is available subject to mutual approval of the banking syndicate and the Corporation, including repayment terms. Collateral for the facilities consists of a demand debenture for $500 million collateralized by a first floating charge over all of the property and equipment of the Corporation. At September 30, 2010, an amount of $122.3 million was drawn against the credit facilities (December 31, 2009 - $217.2 million).

The facilities bear interest at the bank's prime or banker's acceptance rates plus a rate margin. The margin ranges from 1.5% per annum to 5.5% per annum, based upon the Corporation's debt to cash flow ratio. For the three and six months ended September 30, 2010, the effective interest rates were 6.6% and 6.0%, respectively (September 30, 2009 - 4.8% and 3.3%).



GALLEON ENERGY INC.
Consolidated Balance Sheets
($000s) (unaudited) September 30, December 31,
2010 2009
----------------------------------------------------------------------------
ASSETS
CURRENT
Accounts receivable 28,144 41,270
Deposits and prepaid expenses 4,455 6,190
Future income taxes - 2,884
Fair value of financial derivatives 19,046 4,241
----------------------------------------------------------------------------
51,645 54,585

Goodwill 30,155 34,891
Fair value of financial derivatives 3,704 -
Equipment inventory 6,526 6,116
Property and equipment 934,845 1,041,140
----------------------------------------------------------------------------
1,026,875 1,136,732
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES

CURRENT
Accounts payable and accrued liabilities 50,048 55,531
Capital lease - 1,545
Future income taxes 4,067 -
Bank loan 122,283 217,243
Fair value of financial derivatives 3,099 13,789
----------------------------------------------------------------------------
179,497 288,108

Asset retirement obligation 41,986 41,499
Fair value of financial derivatives 11,194 -
Future income taxes 77,002 94,262
----------------------------------------------------------------------------
309,679 423,869
----------------------------------------------------------------------------
SHAREHOLDERS' EQUITY

Share capital 588,174 599,334
Contributed surplus 35,179 28,884
Retained earnings 93,843 84,645
----------------------------------------------------------------------------
717,196 712,863
----------------------------------------------------------------------------
1,026,875 1,136,732
----------------------------------------------------------------------------
----------------------------------------------------------------------------


GALLEON ENERGY INC.

Consolidated Statements of Earnings (Loss), Comprehensive Income (Loss) and
Retained Earnings


($000s, except per share
amounts) Three months ended Nine months ended
(unaudited) September 30 September 30
2010 2009 2010 2009
----------------------------------------------------------------------------
REVENUE
Petroleum and natural gas
revenue 44,279 49,497 161,836 156,857
Royalties, net of GCA (5,280) (9,940) (25,877) (23,375)
Realized gain on financial
derivatives 2,420 699 9,184 8,810
Unrealized gain (loss) on
financial derivative 428 13,342 18,005 (6,966)
Other income - 6 - 752
----------------------------------------------------------------------------
41,847 53,604 163,148 136,078
EXPENSES
Operating 12,978 13,045 38,793 44,132
Transportation 2,110 1,970 6,721 6,368
General and administration 3,930 3,453 10,561 11,481
Restructuring costs 59 - 1,242 -
Goodwill allocated to disposed
properties - - 4,736 -
Interest 1,849 2,876 8,441 6,163
Stock-based compensation 171 2,487 2,873 5,056
Accretion 712 664 2,149 1,987
Depletion and depreciation 29,547 30,600 93,071 98,389
----------------------------------------------------------------------------
51,356 55,095 168,587 173,576

Loss before taxes (9,509) (1,491) (5,439) (37,498)

Income taxes
Capital and other taxes 68 100 134 327
Future income taxes (recovery) (3,956) 224 (14,771) (8,907)
----------------------------------------------------------------------------
(3,888) 324 (14,637) (8,580)
NET EARNINGS (LOSS) AND
COMPREHENSIVE INCOME (LOSS) (5,621) (1,815) 9,198 (28,918)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
RETAINED EARNINGS, BEGINNING OF
PERIOD 99,464 92,114 84,645 119,217
----------------------------------------------------------------------------
RETAINED EARNINGS, END OF
PERIOD 93,843 90,299 93,843 90,299
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NET EARNINGS (LOSS) AND
COMPREHENSIVE INCOME (LOSS)
PER SHARE
Basic (0.07) (0.02) 0.11 (0.37)
Diluted (0.07) (0.02) 0.11 (0.37)
Weighted average Class A
shares - basic 84,869,236 82,890,883 85,036,467 78,082,486
- diluted 84,869,236 82,890,883 85,048,031 78,082,486


GALLEON ENERGY INC.
Consolidated Statements of Cash Flows
($000s) (unaudited) Three months ended Nine months ended
September 30 September 30
2010 2009 2010 2009
----------------------------------------------------------------------------
Cash provided by (used in):

OPERATING ACTIVITIES
Net (loss) earnings (5,621) (1,815) 9,198 (28,918)
Items not requiring cash:
Future income taxes
(recovery) (3,956) 224 (14,771) (8,907)
Depletion and depreciation 29,547 30,600 93,071 98,389
Accretion 712 664 2,149 1,987
Stock-based compensation 171 2,487 2,873 5,056
Unrealized loss (gain) on
financial derivative (428) (13,342) (18,005) 6,966
Goodwill allocated to
disposed properties - - 4,736 -
Abandonment costs (130) (524) (391) (1,048)
Change in non-cash working
capital 5,403 1,413 3,773 9,029
----------------------------------------------------------------------------
25,698 19,707 82,633 82,554
----------------------------------------------------------------------------
FINANCING ACTIVITIES
Issue of common shares - - 268 36,695
Repurchase of common shares (3,544) - (3,544) (32)
Share issue costs - (25) - (1,741)
Capital lease payment (1,135) (1,313) (1,545) (1,719)
Bank loan (repayment) 10,564 (5,030) (94,960) (18,216)
----------------------------------------------------------------------------
5,885 (6,368) (99,781) 14,987
----------------------------------------------------------------------------
INVESTING ACTIVITIES
Disposal of (additions to)
equipment inventory (309) 2,179 (410) 6,599
Additions to oil and gas
properties (40,746) (29,873) (102,409) (79,815)
Acquisition of oil and gas
properties (684) (162) (17,650) (230)
Disposition of oil and gas
properties 1,100 756 132,012 5,389
Change in non-cash working
capital 9,056 13,761 5,605 (29,484)
----------------------------------------------------------------------------
(31,583) (13,339) 17,148 (97,541)
----------------------------------------------------------------------------
CHANGE IN CASH - - - -
CASH, BEGINNING AND END OF
PERIOD - - - -

----------------------------------------------------------------------------
----------------------------------------------------------------------------
SUPPLEMENTARY INFORMATION

Cash interest paid 1,309 2,423 8,049 6,668

Cash taxes paid 93 252 279 627

----------------------------------------------------------------------------


Forward-Looking Statements and Advisories

Statements herein that are not historical facts may be considered forward looking statements including expected 2010 and 2011 production rates, drilling plans and the timing thereof, capital expenditures and the allocation thereof and the method of funding thereof and the timing thereof, expected year end 2010 and 2011 net debt levels, and 2010 and 2011 operating costs, plans to increase proved producing reserves by drilling existing drilling inventory, plans to farm-out certain lands, and 2011 cash flow, cash flow per share, year end debt and debt to cash flow ratio. These forward-looking statements sometimes include words to the effect that management believes or expects a stated condition or result. All estimates and statements that describe the Corporation's future plans are forward-looking statements. Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties 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, incorrect assessment of the value of acquisitions, failure to realize the anticipated benefits of acquisitions, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources. As a consequence, Galleon's actual results may differ materially from those expressed in, or implied by, the forward-looking statements.

Included herein is an estimate of Galleon's 2011 cash flow and cash flow per share and 2011 year end net debt level which are based on the various assumptions as to production levels, commodity prices and other assumptions stated herein. To the extent such estimates constitute a financial outlook, they were approved by management of Galleon on November 11, 2010 and such financial outlook is included herein to provide readers with an understanding of Galleon's anticipated cash flow based on the capital expenditures and other assumptions described herein estimated and the resulting year end debt levels and readers are cautioned that the information may not be appropriate for other purposes.

Forward-looking statements or information are based on a number of factors and assumptions which have been used to develop such statements and information but which may prove to be incorrect. Although Galleon believes that the expectations reflected in such forward-looking statements or information are reasonable, undue reliance should not be placed on forward-looking statements because Galleon can give no assurance that such expectations will prove to be correct. In addition to other factors and assumptions which may be identified in this document, assumptions have been made regarding, among other things: the impact of increasing competition; the general stability of the economic and political environment in which Galleon operates; the timely receipt of any required regulatory approvals; the ability of Galleon to obtain qualified staff, equipment and services in a timely and cost efficient manner; drilling results; the ability of the operator of the projects which Galleon has an interest in to operate the field in a safe, efficient and effective manner; the ability of Galleon to obtain financing on acceptable terms; field production rates and decline rates; the ability to replace and expand oil and natural gas reserves through acquisition, development or exploration; the timing and costs of pipeline, storage and facility construction and expansion; the ability of Galleon to secure adequate product transportation; future oil and natural gas prices; currency, exchange and interest rates; the regulatory framework regarding royalties, taxes and environmental matters in the jurisdictions in which Galleon operates; and the ability of Galleon to successfully market its oil and natural gas products.

Readers are cautioned that the foregoing list of factors and assumptions is not exhaustive. Additional information on these and other factors that could effect 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), or 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.

Non-GAAP Measurements

Galleon uses the term net debt in this news release. 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.

Contact Information

  • Galleon Energy Inc.
    Glenn R. Carley
    Executive Chairman
    (403) 261-6012
    or
    Galleon Energy Inc.
    Steve Sugianto
    President and Chief Executive Officer
    (403) 261-6012
    or
    Galleon Energy Inc.
    Shivon Crabtree
    Vice President and Chief Financial Officer
    (403) 261-6012
    www.galleonenergy.com