Grey Wolf Exploration Inc.
TSX : GWE

Grey Wolf Exploration Inc.

November 08, 2006 17:00 ET

Grey Wolf Provides Operational and Third Quarter Updates

CALGARY, ALBERTA--(CCNMatthews - Nov. 8, 2006) - Grey Wolf Exploration Inc. ("Grey Wolf") (TSX:GWE) is pleased to announce that it has entered into an agreement with Duke Energy Field Services Canada ("Duke") whereby Duke has agreed to build a pipeline to transport Grey Wolf's Pouce Coupe/Valhalla production to its Gordondale plant. Grey Wolf will receive firm service for 6 million cubic feet ("MMcf") per day of natural gas in the pipeline and gas plant, with a right to increase the firm service beyond 6 MMcf per day. It is expected that the pipeline will be completed in April or May 2007.

In addition, the Company is pleased to announce that it has received approval from the Energy and Utilities Board ("the EUB") on the first of three downspacing applications in the Pouce Coupe/Valhalla area for Doig and Montney production. The downspacing will allow Grey Wolf to initiate a large natural gas development program where as many as 40 net wells may be drilled in the future. The construction of the Duke Energy pipeline into the heart of the Grey Wolf land position will ensure the development program will proceed unimpeded by a lack of plant processing capacity.

Operational Update

In the Peace River Arch area, the completion and tie-in of four wells drilled in the first quarter has begun.

A Pouce Coupe well (GWE 50 percent working interest) has been completed in two zones and flowed at a combined rate of 1.6 MMcf per day. Tie-in and installation of compression has been completed and production from this well commenced in mid-October to the CNRL Progress gas plant at a rate of approximately 1.2 MMcf per day.

A second Pouce Coupe well (GWE 100 percent working interest) has been completed in three zones where the combined flow was 4.0 MMcf per day. Tie-in and installation of compression is in progress and we anticipate production from this well will commence in November. It should be noted that production test data refers to preliminary tests only. Sustainable production information will be reported as it becomes available.

A third Pouce Coupe well (GWE 50 percent working interest) was completed in the spring in three zones and tested a total of 3.2 MMcf per day. A fourth Pouce Coupe well (GWE 50 percent working interest) is currently being completed in three zones. Pipeline construction to tie-in these wells to the CNRL Progress gas plant is expected to be completed in November.

In Valhalla, a well (GWE 75 percent working interest) has been completed in three zones, where combined flow was 4.5 MMcf per day. Pipeline construction has commenced to tie-in this well to the CNRL Progress gas plant and production is expected to commence in November.

In North Pouce Coupe, a well (GWE 35 percent working interest) was recently drilled and cased. This well has two zones in the Triassic to be completed and the operator is expected to commence this operation soon.


Grey Wolf participated in a well in the South Knopcik area (GWE 50 percent working interest). The well contains two zones where the first zone tested 1.7 MMcf per day. The second zone will remain behind pipe while the operator proceeds with tieing in the well to nearby pipeline and plant infrastructure.

A well drilled in the Widewater area (GWE 100%) has been cased and completion is underway at the time of writing.

Following the sale of a portion of the Caroline assets to PrimeWest, Grey Wolf has retained an interest in 16,965 gross 12,670 net undeveloped acres, as well as two producing wells and a completed well that is waiting to be tied in. The two producers are currently making 137 boe per day net to Grey Wolf interest. The completed Cardium well is expected to produce at about 200 boe per day and 1.2 MMcf per day on a gross basis, similar to the discovery well where Grey Wolf has a 25.1 percent working interest. Tie-in of this well is currently underway and the related pipeline is scheduled to start construction mid November, with completion scheduled by year end.

Three wells, where Grey Wolf has a 15 to 25.1 percent working interest will further develop this Cardium trend. One has been successfully drilled and cased and two farm-in wells are planned. The first of these farm-in wells is due to spud in November and the second may spud first quarter 2007. All of the solution gas from these potential Cardium oil wells will be transported by the soon to be constructed pipeline underneath the Red Deer River and will be processed at a nearby gas plant.

Two wells have also been drilled recently, in which Grey Wolf has a working interest ranging from 10 to 15 percent, that have targeted Viking, Cardium and Mannville reservoirs. Casing has been set on these wells and the operator has commenced completion of these wells. A third well where Grey Wolf has retained an 18.75 percent working interest following a farmout has been cased and completion is currently underway with very encouraging results to-date.



Highlights of Third Quarter Financial and Operational Results

Three months ended Nine months ended
-------------------------- --------------------------
($000's except per Sept 30, Sept 30, Percent Sept 30, Sept 30, Percent
share amounts) 2006 2005 Change 2006 2005 Change
-------------------------- --------------------------
Oil and natural gas
revenue $ 9,101 $11,377 (20) $30,742 $28,855 7
Cash flow from
operations 4,048 7,770 (48) 15,134 17,713 (15)
Per share - basic 0.13 0.25 (48) 0.49 0.66 (26)
Per share - diluted 0.13 0.24 (46) 0.47 0.64 (27)
Net income 591 3,143 (81) 3,683 3,450 7
Per share - basic 0.02 0.10 (80) 0.12 0.13 (8)
Per share - diluted 0.02 0.10 (80) 0.11 0.12 (8)
Average AECO price
($ per GJ) 5.35 8.78 (39) 6.06 7.43 (18)
Operating netback
($ per boe) 27.89 41.04 (32) 28.22 35.73 (21)
Capital expenditures 8,009 14,597 (45) 50,974 19,054 168
Property dispositions 30,789 - - 30,789 - -

Operations
Crude oil
- barrels per day 387 212 83 362 228 59
Natural gas
- Mcf per day 8,475 10,309 (18) 10,056 9,969 1
NGLs - barrels per day 256 251 2 321 219 47
boe - barrels per day 2,056 2,181 (6) 2,359 2,108 12

Abbreviations
bbl = barrels
Mcf = thousand cubic feet
NGLs = natural gas liquids
bbl/d = barrels per day
Mcf/d = thousand cubic feet per day
GJ = gigajoule
boe = barrels of oil equivalent
(000's) = stated in thousands


"Cash flow from operations", "Cash flow from operations per share - basic", and "Cash flow from operations per share - diluted", are not measures that have any standardized meaning prescribed by Canadian GAAP and are considered non-GAAP measures. Therefore, these measures may not be comparable to similar measures presented by other issuers. These measures have been described and presented in this management's discussion and analysis in order to provide measures presented by other issuers. These measures have been described and presented in this management's discussion and analysis in order to provide shareholders and potential investors with additional information regarding the Company's liquidity and its ability to generate funds to finance its operations.

Management utilizes "Cash flow" as a key measure to assess the ability of the Company to finance operating and capital activities. All references to cash flow from operations throughout this release are based on cash flow before site restoration costs and changes in non-cash working capital.

The calculation of barrels of oil equivalent ("boe") is based on a conversion ratio of six thousand cubic feet of natural gas to one barrel of oil to estimate relative energy content and does not represent a value equivalency - boes may be misleading, particularly if used in isolation.

Net earnings of $0.6 million were recorded in the third quarter of 2006, down 81 percent or $2.6 million from the same period in 2005. Cash flow from operations decreased 48 percent to $4.0 million in the third quarter of 2006 from $7.8 million in the third quarter of 2005. The decrease in net earnings and cash flow from operations in the third quarter of 2006 was primarily due to a 29 percent reduction in natural gas prices, lower production volumes caused by third party plant outages and curtailments, higher operating and financing costs. The sale of certain properties in the Caroline area also contributed to the decrease in net earnings for the third quarter of 2006.

Net earnings for the first nine months of 2006 were $3.7 million, slightly higher than the $3.5 million reported in the first nine months of 2005. The increase in net earnings was a result of the $3.2 million one time non-recurring expense related to the early repayment of a US$35.0 million term loan on February 28, 2005. Cash flow from operations decreased 15 percent to $15.1 million in the first nine months of 2006 from the $17.7 million during the first nine months of 2005. The decrease in cash flow for the first nine months of 2006 was primarily due to reduced natural gas prices, third party plant outages and curtailments, higher financing costs and higher operating costs.

Production revenue from crude oil, natural gas liquids and natural gas sales decreased 20 percent to $9.1 million in the third quarter of 2006 from $11.4 million during the third quarter of 2005. This decrease was primarily due to lower production volumes and lower natural gas prices. Natural gas prices during the third quarter of 2006 averaged $6.37 per Mcf, 29 percent lower than the $7.85 per Mcf received during the same period in 2005. Total production volumes in the third quarter of 2006 averaged 2,056 boe per day, a 6 percent decrease compared to the 2,181 boe per day recorded in the same period of 2005. The decrease in production was attributable to the curtailment of production volumes from third party processing facilities and the completion of the sale of producing assets (550 boe per day) at Caroline on August 25, 2006. The sale reduced production by approximately 180 boe per day during the third quarter of 2006. Crude oil production increased 83 percent to 387 boe per day during the third quarter of 2006. The increase was due to new wells on production in the Valhalla and Caroline areas.

The increase in production during the first nine months of 2006, compared to the first nine months of 2005, was the primary reason for the 7 percent increase in total revenues to $30.7 million from $28.9 million recorded in the same period in 2005. This increase was partially offset by a 12 percent decrease in realized natural gas prices. Total daily crude oil and liquids production increased 53 percent to 683 boe per day during the first nine months of 2006 from 447 boe per day in the first nine months of 2005. For the first nine months of 2006, natural gas production remained the same as 2005 at 10.1 MMcf per day. Without the plant turnaround and production curtailments from third party facilities and the sale of the Caroline properties, production volumes for the first nine months of 2006 would have been higher.

Production expense during the third quarter of 2006 increased to $1.7 million or $8.97 per boe compared to $0.9 million or $4.56 per boe for the same period of 2005. Operating costs for the third quarter of 2006 were higher on a boe basis because of additional requirements of compressor rentals, high fuel and trucking costs and industry wide inflation in service costs. These higher fixed operating costs, combined with production curtailments and the sale of the low operating cost Caroline area production during the third quarter of 2006, pushed up operating costs per boe to $8.97.

For the first nine months of 2006, operating costs rose by 75 percent to $4.9 million from $2.8 million in 2005. The increase was associated with higher production and factors as discussed above.

Operating netbacks of $27.89 per boe declined 32 percent in the third quarter of 2006, compared to the $41.04 per boe earned in the third quarter of 2005. This decrease was the result of lower natural gas price and higher operating costs, somewhat offset by a slight decrease in the NOVA transportation expense. Operating netbacks decreased by 21 percent to $28.22 per boe for the first nine months of 2006 compared to the $35.73 per boe for the first nine months of 2005. During the first nine months of 2006, oil and natural gas liquid prices were slightly ahead of the 2005 average. However, lower natural gas prices, together with higher operating costs and high royalty burdens, lowered the operating netbacks from $35.73 per boe to $28.22 per boe in 2006.

Capital expenditures for the third quarter of 2006 totalled $8.0 million, a 45 percent reduction from the $14.6 million spent during the same period in 2005. The majority of the capital expenditures relate to drilling and facilities. In August 2006, the Company completed the disposition of certain Caroline area assets. The property disposition of approximately $30.8 million was credited to property and equipment.

Capital expenditures for the first nine months of 2006 amounted to $51.0 million, which was substantially higher than the $19.0 million incurred during the first nine months of 2005. The increase was due to the acceleration of the Company's capital expenditure program in the first nine months of 2006, and the restriction of capital spending due to the early spring break-up and unprecedented heavy rainfall in the first nine months of 2005. During the first nine months of 2006, over 30% of our capital program was directed toward constructing and expanding field infrastructure which will reduce the time required for future tie-ins and assist in getting production on stream quickly.

Grey Wolf Exploration Inc. will continue to focus on building its core areas, with emphasis on natural gas related activities", stated Bob Watson, Chairman and Chief Executive Officer of the Corporation. "The Duke pipeline agreement provides a resolution to the curtailment issues that have the impacted Grey Wolf's production volumes over the last six months and enables Grey Wolf to proceed with its major natural gas drilling program within the area.

Although natural gas prices were substantially lower in the third quarter of 2006 compared to 2005, we remain very bullish on the prospect for strong future prices. With the current high service costs and low commodity prices, Grey Wolf will carefully evaluate and adjust its capital program to lessen the impact of these negative market conditions. We believe this environment will improve in the near term and will work towards ensuring that Grey Wolf is financially viable to take advantage of future improvements to pricing levels and other opportunities that may present themselves.

Grey Wolf's third quarter 2006 financial statements and related management's discussion and analysishave been filed on www.sedar.com and are available on the corporate website at www.greywolf.ca.

Revised 2006 Capital Expenditures

The Board of Directors of Grey Wolf has also authorized an increase in the 2006 capital spending program to a total of $64 million from the previously approved $55 million. The majority of the increase in spending will be directed toward drilling and completions within the Peace River Arch. The Company has now budgeted to participate in the drilling of approximately 23 gross (12.4 net) wells during 2006. It is anticipated 60 percent of its 2006 capital program will be spent on drilling and completion operations, 33 percent on infrastructure and 5 percent on land and seismic. After deducting the 550 boe per day attributed to the Caroline sale, a revised 2006 forecast is as follows:



Selected 2006 Forecast Data:

- Average daily production volume Approximately 2,280 boe per day
- 2006 production capacity exit rate Approximately 2,500 boe per day
- 2006 curtailed production exit rate Approximately 2,250 boe per day
- Average corporate royalty rate 26 percent
- Lease operating expenses of
approximately $7.50 per boe
- General and administrative expenses
of approximately $3.00 per boe
- 2006 common shares - basic (000's) 30,802


2007 Capital Expenditure Program

The Company also announced that its Board of Directors approved the 2007 capital spending program to a total of $25.0 million. Due to the uncertainty of natural gas prices and high service costs, we have chosen to take a very conservative approach to our development plan going forward which leaves us with the financial flexiability to quickly ramp up our program as conditions improve. The 2007 program will be directed toward executing the large natural gas program in the Pouce Coupe/Valhalla area of the Peace River Arch. These wells are relatively low risk, cost effective and quick to bring onstream. The 2007 capital program consists of drilling a total of 8 gross (5.8 net) wells and the pursuit of strategic property acquisitions.



Selected 2007 Forecast Data:

- Average daily production volume Approximately 2,500 boe per day
- 2007 production capacity exit rate Approximately 2,500 boe per day
- 2007 curtailed production exit rate Approximately 2,400 boe per day
- Average corporate royalty rate 25 percent
- Lease operating expenses of
approximately $9.70 per boe
- General and administrative expenses
of approximately $2.90 per boe
- 2006 common shares - basic (000's) 30,802


Note: A barrel of oil equivalent ("boe") is derived by converting natural gas to oil in the ratio of six thousand cubic feet of natural gas to one barrel of oil equivalent. A boe conversion may be misleading, particularly if used in isolation, as it is based on an energy equivalency conversion method primarily applicable at the burner tip and may not represent a value equivalency at the wellhead.

Grey Wolf is an independent Alberta-based, junior oil and natural gas company involved in the development and production of natural gas and crude oil in the Western Canadian Sedimentary Basin. Its common shares trade on the Toronto Stock Exchange under the symbol "GWE".

Forward-Looking Statements - Certain information set forth in this document, including management's assessment of Grey Wolf's future plans and operations, contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond Grey Wolf's control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the lack of availability of qualified personnel or management, stock market volatility and ability to access sufficient capital from internal and external sources. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. Grey Wolf's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements. No assurance can be given that any of the events anticipated will transpire or occur, or if any of them do so, what benefits Grey Wolf will derive from them. Grey Wolf disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Contact Information

  • Grey Wolf Exploration Inc.
    Mr. Robert L. G. Watson
    Chairman and Chief Executive Officer
    (403) 218-1477
    or
    Grey Wolf Exploration Inc.
    Mr. Robert A. Johnson
    Executive Vice President
    (403) 218-1472
    Email: bjohnson@greywolf.ca
    Website: www.greywolf.ca