Grey Wolf Exploration Inc.

Grey Wolf Exploration Inc.

March 20, 2007 18:46 ET

Grey Wolf Provides Year End Results and Operational Update

CALGARY, ALBERTA--(CCNMatthews - March 20, 2007) -


Grey Wolf Exploration Inc. (TSX:GWE) ("Grey Wolf" or "the Company") is pleased to announce its financial and operating results for the year ended December 31, 2006, and provide an operational update for 2007:


- Grey Wolf invested $62.3 million during the year ending December 31, 2006. This resulted in the proven plus probable reserve additions of 4,226 thousand barrels of oil equivalent ("Mboe"), enough to largely offset negative revisions of 1,030 Mboe, the sale of 2,441 Mboe in Caroline and annual production of 787 Mboe.

- Finding and development costs, excluding revisions and divestitures, were $14.73 per boe (proven plus probable), without change in future capital.

- 2006 saw the end of the Caroline farmout to PrimeWest, and the subsequent sale to PrimeWest of Grey Wolf reserves and production developed during the farmout. Total reserves of 2,441 Mboe (proven plus probable) were sold for $32.9 million.

- Daily production in 2006 averaged 2,156 boe per day. Production was severely impacted by the Caroline sale (an impact of 550 boe/d), by plant turn around, repair and curtailment at various times throughout the year and these numbers do not reflect the Corporation's production capacity.

- Our production limitation problems will soon be behind us, with a return to full productive capacity anticipated by the end of April. Curtailed production at Pouce Coupe and Valhalla is expected to flow shortly to alternate processing facilities. Production at Ladyfern is scheduled to recommence by the end of March. New production is flowing from Widewater, and Caroline is expected to come on stream by May 1st.

- All downspacing approvals in our key Pouce Coupe core area have been received. This adds in the order of 40 net accretive drilling locations to our future drilling portfolio.


Three Months Ended Year Ended
------------------ ----------
($000's except per Dec. 31, Dec. 31, Percent Dec. 31, Dec. 31, Percent
share amounts) 2006 2005 Change 2006 2005 Change
------------------------- -----------------------------

Oil and natural gas
revenue 6,614 14,596 (55) 37,356 43,452 (14)
Cash flow from
operations 2,296 9,194 (75) 17,430 26,907 (35)
Per share - basic 0.08 0.30 (73) 0.57 0.96 (41)
Per share - diluted 0.07 0.29 (76) 0.55 0.94 (41)
Net income (loss) (331) 3,615 (109) 3,352 7,065 (53)
Per share - basic (0.01) 0.12 (108) 0.11 0.25 (56)
Per share - diluted (0.01) 0.11 (109) 0.10 0.25 (60)
Capital expenditures 11,291 23,836 (53) 62,265 42,890 45
Property divestures (164) - - (30,953) - -
Total debt, including
working capital
deficiency 31,491 17,338 82
Weighted average
shares (000s)
Basic 30,802,360 27,973,863 10
Diluted 31,955,570 28,687,567 11


Daily production
Crude oil (bbl/d) 354 276 28 360 240 50
Natural gas (Mcf/d) 6,425 9,970 (36) 9,141 9,969 (8)
NGLs (bbl/d) 127 467 (73) 272 281 (3)
Boe/d @ 6:1 1,553 2,405 (35) 2,156 2,183 (1)

Average prices
Oil & NGL ($/bbl) 55.24 60.97 (9) 62.03 61.30 1
Natural gas ($/Mcf) 7.04 11.37 (38) 6.91 8.74 (21)

Operating expenses
($/boe@ 6:1) 13.92 5.39 158 8.76 5.01 75
Operating netback
($/boe) 23.52 47.72 (51) 27.36 39.06 (30)
Funds from operations
($/boe) 16.07 41.55 (61) 22.15 33.78 (34)
Drilling Activity
Gross wells 4 9 25 24
Working interest
wells 0.7 5.3 12.7 16.6
Success rate,
net wells 100% 93% 76% 98%

Financial Results

"Cash flow from operations", "Cash flow - basic", and "Cash flow - 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 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 throughout this report are based on Cash flow before site restoration costs and before changes in non-cash working capital related to operating activities.

The Company's production averaged 2,156 boe/d for the year of 2006, a slight decrease from the 2,183 boe/d recorded last year. Grey Wolf's production did not meet our guidance for 2006 as a result of productive capacity issues with third party facilities severely limiting our production throughout the year, decreasing the 2006 production volumes by an average of 511 boe/d. The Caroline asset sale, which closed on August 25, resulted in a further decrease of approximately 184 boe/d of production in 2006.

The production curtailment resulting from issues at third party facilities (approximately 660 boe/d), the sale of certain Caroline assets (550 boe/d) and the settlement with a joint venture partner for a prior overpayment of $0.8 million in royalties (176 boe/d), were the main factors for the decrease in production volume from 2,405 boe per day in the fourth quarter of 2005 to 1,553 boe per day in the same period of 2006.

Natural gas production for 2006 averaged 9.1 MMcf/d, an 8% decrease from 10.0 MMcf/d in the previous year. The decrease in natural gas production was partially offset by an increase in crude oil and NGL production. Total daily crude oil and NGL production increased 21% to 632 boe/d in 2006 compared to 521 boe/d for the same period last year. Grey Wolf's production profile continued to be weighted to natural gas during 2006, consisting of 71% natural gas and 29% crude and NGL.

Net income decreased 53% to $3.4 million during the year of 2006 from $7.1 million in the same period of 2005. Cash flow from operations decreased 35% to $17.4 million in 2006 from $26.9 million in 2005. The decrease in both net income and cash flow in 2006 was attributable to the steep decline in natural gas prices and the increase in operating costs and interest expense, offset somewhat by a decrease in general and administrative and transportation expenses.

Capital expenditures increased 45% to $62.3 million in 2006, from $42.9 million in 2005. The majority of the capital expenditures were spent on development activities and the remaining spent on land, seismic and other. During 2006, Grey Wolf spent $19.7 million or 32% of the total capital expenditures toward constructing and expanding field infrastructure which will reduce the time required for future tie-ins and assist in getting production on stream quickly. During the third quarter of 2006, the Company completed the disposition of certain Caroline properties for gross proceeds of $32.9 million, resulting in net cash proceeds of approximately $30.8 million ($31.0 million after adjusting other non-cash item).

Oil and Gas Reserves

The Company's reserves were evaluated for the year ended December 31, 2006 by DeGolyer and MacNaughton ("D&M") in accordance with the rules provided by National Instrument 51-101. The following table provides summary information presented in the D&M report effective December 31, 2006 and based on the D&M constant price and costs. Some of the information contained herein summarizes certain information contained in the D&M reserves report effective December 31, 2006. Grey Wolf will provide additional information in its Annual Information Form and other filings. The Grey Wolf crude oil, natural gas liquids and natural gas volumes provided herein are estimates only and there is no guarantee that the estimated reserves will be recovered. The actual crude oil, natural gas liquids and natural gas volumes eventually recovered may be greater than or less than the reserves estimates provided herein.

Barrels of
Crude Oil NGLs Natural Gas Oil Equivalent
WI Net WI Net WI Net WI Net
---------- ------------- ------------- ----------------
Mbbl Mbbl Mbbl Mbbl MMcf MMcf Mbbl Mbbl
---------- ------------- ------------- ----------------

Producing 444 414 451 346 20,620 17,715 4,332 3,712
Non-producing 140 116 183 126 9,374 7,235 1,885 1,448
Undeveloped 23 21 79 54 5,853 4,697 1,078 858
---------- ------------- ------------- ----------------

Total proved 607 551 713 526 35,847 29,647 7,295 6,018
Probable 369 323 589 386 31,389 24,075 6,190 4,721
---------- ------------- ------------- ----------------

Total proved plus
probable 976 874 1,302 912 67,236 53,721 13,485 10,739
---------- ------------- ------------- ----------------

(1) WI means, Grey Wolf's working interest (operating and non-operating)
share before deduction of royalties and excluding any royalty interest
of the Company.

(2) Net reserves means, Grey Wolf's working interest
(operated and non-operated) share after deduction of royalty's
obligations, plus Grey Wolf's royalty interest in reserves.

(3) 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.

(4) May not add due to rounding.

The following reconciliation of Grey Wolf's working interest (note 1)
reserves compares changes in the Company's reserves as at
December 31, 2005 to the reserves as at December 31, 2006:

Total Proved Total Proved Plus Probable
-------------- ----------------------------
Oil NGL's Gas Mboe Oil NGLs Gas Mboe
Mbbls Mbbls MMcf boe@6:1 Mbbls Mbbls MMcf boe@6:1
---------------------------- ------------------------------
Balance, Dec. 31,
2005 919 857 41,291 8,658 1,586 1,283 63,742 13,492

Additions 107 236 9,861 1,987 122 372 22,391 4,226
Divestitures (11) (326) (9,525) (1,925) (11) (414) (12,093) (2,441)
Revisions (279) 45 (2,569) (662) (592) 160 (3,594) (1,030)
Production (129) (99) (3,211) (763) (129) (99) (3,211) (763)
---------------------------- ------------------------------

Balance, Dec. 31,
2006 607 713 35,847 7,295 976 1,302 67,235 13,484
---------------------------- ------------------------------


(1) Working interest reserves, means Grey Wolf's working interest (operating
and non-operating) share before deduction of royalties and excluding
any royalty interest of the Company.

(2) May not add due to rounding.

Capital Program Efficiency

The efficiency of the Company's capital program for the year ended
December 31, 2006 is summarized below:

2006 2005 2 Year Average
---- ---- ---------------

Proved + Proved + Proved +
Proved Probable Proved Probable Proved Probable
---------------- --------------- ----------------

Capital expenditures
($000) 62,265 62,265 42,890 42,890 52,578 52,578
Change in future
development capital
($000) (5,114) 2,550 20,050 65,570 7,468 34,060
---------------- --------------- ----------------

Total costs ($000) 57,151 64,815 62,940 108,460 60,046 86,638
---------------- --------------- ----------------

Reserves additions,
including revisions
(Mboe) 1,325 3,196 6,102 8,679 3,714 5,938
---------------- --------------- ----------------
Reserves additions,
excluding revisions
(Mboe)(4) 1,987 4,226 5,922 9,074 3,955 6,650

Finding and development
costs, excluding
revisions and without
change in future capital
($/boe)(4) 31.34 14.73 7.24 4.73 13.30 7.91
---------------- --------------- ----------------
Finding and development
costs, excluding
revisions and with change
in future capital
($/boe)(4) 28.76 15.34 10.63 11.97 15.18 13.03
---------------- --------------- ----------------
Finding and development
costs, including
revisions and without
change in future capital
($/boe)(4) 47.00 19.48 7.03 4.94 14.16 8.86
---------------- --------------- ----------------
Finding and development
costs, including
revisions and with change
in future capital ($/boe) 43.13 20.28 10.31 12.52 16.17 14.59
---------------- --------------- ----------------

Operating netback ($/boe) 27.36 31.96
Finding and development
costs ($/boe) 47.00 19.48
Recycle ratio 0.6 1.4

Reserves additions,
excluding revisions
(Mboe) 1,987 4,226
Reserves additions,
including revisions
(Mboe) 1,325 3,196
Total production 2006
(Mboe) 787 787
Reserves replacement,
excluding revisions 252% 537%
Reserves replacement,
including revisions 168% 406%

Total working interest
reserves (Mboe) 7,295 13,484
Total production 2006
(Mboe) 787 787
RLI based on 2006 annual
production (years) 9.3 17.1


(1) "Cash flow from operations" is calculated as cash provided by operating
activities from the statement of cash flows. "Cash flow from
operations" does not have a standardized measure prescribed by Canadian
Generally Accepted Accounting Principles and therefore may not be
comparable with the calculations of similar measures for other

(2) "Operating netback" - Grey Wolf calculates operating netback as Company
gross revenues less royalties and production expenses.

(3) The aggregate of the exploration and development costs incurred in the
most recent financial year and the change during that year in estimated
future development costs generally will not reflect total finding and
development costs related to reserves additions for that year.

(4) Additional data provided for information purposes.

Reserves Values

The before tax estimated future net revenues associated with Grey Wolf's reserves effective December 31, 2006 based on D&M's forecast prices and December 31, 2006 constant prices are summarized in the following table:

Forecast Prices Constant Prices
---------------- ----------------
5% 10% 5% 10%
---------------- ----------------
Producing 109 87 84 68
Non-producing 38 30 29 22
Undeveloped 12 6 6 3
Total proved 159 123 119 93
Probable 71 41 43 23

Total proved and probable 230 164 162 116


(1) The estimated future net revenues are stated before deducting future
estimate site restoration costs and are reduced for estimated future
abandonment costs (of undiscounted $1,321,000 for total proved reserves
and undiscounted $2,053,000 for total proved plus probable reserves)
and estimated capital for future development associated with the

(2) Constant pricing assumptions include $68.33 per bbl Edmonton posting
adjusted to stream for oil and $6.13 per Mcf Alberta AECO Hub posting
for gas assuming a heating value of 1,000 BTU/SCF.

(3) May not add due to rounding.

2007 Operational Update


To-date, Grey Wolf has drilled and cased 3 gross (2.0 net) wells and 1 gross (0.75 net) well is drilling. One gross (0.50 net) well has been completed and tested at a gross rate of 700 Mcf per day. Service rigs are on site at the remaining two well locations and completion is in progress with no flow test data available at this date.

The tie-in of substantially all of the wells drilled and completed in Pouce/Valhalla during 2006 has been finished during the first quarter of 2007. Due to curtailment of Grey Wolf gas because of lack of processing capacity, over 13 kilometers of gas gathering systems within the fields have been constructed during the first quarter of 2007 in preparation for currently producing and curtailed natural gas to flow to alternate gas processing facilities.


In Caroline, facility construction to bring on shut-in Cardium production has been delayed due to land owner interventions. The Cardium production, of which Grey Wolf expects an incremental 300 boe per day, is now delayed to come onstream in late April or early May. Good Production Practice approval is pending and anticipated to be received concurrent with the facility startup.


In Widewater, the shallow gas gathering system and field compression project has been completed and production has commenced last week. When all equipment startup difficulties are smoothed out, Grey Wolf's share of production is expected to be in the range of 75 to 100 boe per day.


At Ladyfern, 1 gross well (0.17 net) was drilled during the fourth quarter of 2006 and completed during the first quarter of 2007. This well tested at a gross rate of 900 Mcf per day at a flowing surface pressure of 2,160 psi.

Grey Wolf's gas production in the Ladyfern area has been shut-in since early November 2006 due to lack of plant processing capacity. Alternate third party gas plant capacity has been secured and gathering systems and compression installation is expected to be finished by the end of March. Curtailed production from existing wells and production from the most recently drilled well will see approximately 125 to 150 boe per day of Grey Wolf's share of production come on by the end of March 2007.


To use what is by now a well worn cliche, Grey Wolf has weathered a perfect storm of negatively impacting, largely third party issues during a turbulent 2006.

These issues are now behind us and we can look forward to unimpeded production from currently developed reserves, and the ability to drill and develop further production into assured pipeline capacity in our key Pouce Coupe core area.

Our balance sheet is sound and costs, while markedly up throughout industry, are under control. As a consequence, Grey Wolf is well placed to exploit, not only its own inventory of drillable prospects, but to also be watchful for acquisition opportunities over the course of 2007.

The Management's Discussion and Analysis ("MD&A") and full financials associated with this release will be posted on the Company's website and on SEDAR today.

Grey Wolf Exploration Inc. ("Grey Wolf" or the "Company") is engaged in the business of exploration for, development and production of crude oil, natural gas and natural gas liquids in the Provinces of Alberta and British Columbia.

Forward-Looking Statements - Certain statements contained in this Annual Information Form constitute forward-looking statements. These statements relate to future events or our future performance. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as "seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe" and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. We believe the expectations reflected in those forward-looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this Annual Information Form should not be unduly relied upon. These statements speak only as of the date of this Annual Information Form. We assume no obligation to revise or update these statements except as required pursuant to applicable securities laws.

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