Magnus Energy Inc.

Magnus Energy Inc.

November 27, 2006 18:24 ET

Magnus Energy Announces Third Quarter Results and Operational Update

CALGARY, ALBERTA--(CCNMatthews - Nov. 27, 2006) - Magnus Energy Inc. (TSX VENTURE:MEI.A) (TSX VENTURE:MEI.B) ("Magnus" or the "Company") is pleased to announce its financial and operating results for the third quarter of 2006.

Highlights of 2006

- Emerging light oil discovery at Antler in southeast Saskatchewan.

- Raised $19.1 million of equity in 2006 ($9 million on October 24, 2006).

- 27 wells (16.5 net) drilled or in progress to September 30th, with a net success rate of 73%.

- Independent reserves evaluation prepared by GLJ Petroleum Consultants, gives Magnus 2,061 MBOE of proven plus probable reserves in total as of September 30, 2006.

- 143,700 gross acres (95,800 net) and an inventory of more than 370 potential drilling locations.

- Obtained $11 million in bank credit facilities, increased to $14.5 million in October 2006.

- Third quarter production averaged 404 BOE per day.

Financial Highlights Three months Three months Nine months Nine months
ended ended ended ended
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
Production - Oil bbls/d 124.0 - 75.3 -
- Gas mcf/d 1,637.0 - 822.0 -
- NGL's bbls/d 7.1 - 3.9 -
- BOE/d 403.9 - 216.2 -

Gross Revenues $ 1,749,513 - $ 2,804,874 -
Royalties, net of ARTC (304,163) (423,111)
1,445,350 2,381,763
Operating expenses 569,618 - 1,213,229 -
Cash flow from field
operations 875,732 - 1,168,534 -
Net back $/BOE $ 23.57 $ 19.79
Interest income 99 53,704 34,867 53,704
General and
administrative expenses 394,337 266,255 1,316,142 456,776
Interest expense and
financing costs 112,524 - 636,305 -
Current taxes and
interest 100,000 100,000
Cash flow 268,970 (212,551) (849,046) (403,072)
Cash flow per share 0.01 (0.01) (0.03) (0.05)

Depletion and
depreciation 1,469,952 8,749 2,381,833 8,749
Future tax provision
(recovery) (356,862) (1,064,118)
Other non - cash
accretion expenses 165,125 46,375 614,547 46,375
Earnings (loss) (1,009,245) (267,675) (2,781,308) (458,196)
Earnings (loss) per
share (0.03) (0.02) (0.10) (0.04)
Weighted average class A
shares - basic 30,096,428 14,883,071 27,641,481 7,552,801

Source and Use
of Funds Three months Three months Nine months Nine months
ended ended ended ended
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
Issuance of shares,
net of costs $ 177,060 $ 10,695,145 $ 9,589,329 $12,838,592
Funds provided (used)
by operations 268,970 (212,551) (849,046) (403,072)
Bank operating loan 6,430,000 - 8,780,000
KVR cash and working
capital balance - - 246,513 -
Change in non-cash
working capital (2,427,564) (1,047,414) 5,923,977 (1,103,354)
4,448,466 9,435,180 23,690,773 11,332,166

Additions to property
and equipment 4,093,992 3,490,447 22,832,528 3,499,666
Cash used to acquire KVR - - 5,780,190 -
4,093,992 3,490,447 28,612,718 3,499,666
Increase (decrease) in
cash 354,474 5,944,733 (4,921,945) 7,832,500

Consolidated Balance Sheets September 30, December 31,
2006 2005
Assets $ $

Cash and cash equivalents 52,812 4,974,757
Accounts receivable 2,806,073 958,223
Prepaid expenses and deposits 267,333 46,387
Total Current 3,126,218 5,979,367

Property and equipment 51,332,899 9,402,774
Future tax asset - 1,746,064
54,459,117 17,128,205

Liabilities and Shareholders' Equity
Accounts payable and accrued
liabilities 11,617,476 3,624,702
Bank debt 8,780,000 -
20,397,476 3,624,702

Asset retirement obligation 909,546 123,365

Future tax liability 7,923,700 -
29,230,722 3,748,067

Share capital 29,441,660 15,386,063
Contributed surplus 796,897 222,929
Deficit (5,010,162) (2,228,854)
25,228,395 13,380,138
54,459,117 17,128,205

Financial Review to September 30, 2006

BOE's per day
First Second Third
Area Product Quarter Quarter Quarter
Antler, Sk. Light Oil 14 3 77
Paradise Valley, Ab. Gas - 23 126
Ferrybank, Ab. Oil/gas 8 12 11
Killam, Ab. Oil/gas 19 24 27
Leahurst, Ab. Gas 1 24 113
Red Willow, Ab. Oil 21 26 21
Galahad, Ab. Oil 7 3 2
Retlaw, Ab. Oil/gas 19 32 24
Minors Oil/gas 2 3 3
Total 91 150 404

Paradise Valley gas production began in mid June which led to a third quarter production average of 404 BOE per day. Workovers in July and August accounted for an increase at Leahurst during the summer, while wells drilled in May and June at Antler also added new production. Third quarter production was 32% oil and liquids, and 68% natural gas.

Gross revenues reached $2.8 million for the first nine months of 2006 from an average of 216 BOE per day of production. Oil sales represented 49% of the total gross revenues for the nine months, due to the higher price received for oil compared to natural gas prices on a BOE basis. Crown royalties averaged 9.7% of gross sales which is almost all related to Alberta since the Company's wells at Antler in S.E. Saskatchewan qualify for 'deep well' royalty exemptions. All other non-crown royalties averaged 8.9% of gross sales. Gross revenues were $1,749,513 for the third quarter (62% of the year to date revenues) and up from the $641,842 for the second quarter of 2006. Revenues increased in the third quarter due to production added from new wells drilled in 2006 to date.

The Company obtained an $11 million bank facility at the end of June 2006 and used a portion to pay out the $4.25 million bridge loan acquired in January to assist with the KVR acquisition. At September 30, 2006 the Company had an unused bank loan amount of $2.2 million.

At September 30, 2006, the Company had a working capital deficiency of $8,491,258 in addition to bank debt of $8,780,000. Subsequent to September 30, 2006, the Company raised net proceeds of $8.1 million through an equity financing, and had its bank credit facility increased from $11 million to $14.5 million. The Company also has flow through share obligations for 2007 in which it must spend $12.5 million in eligible exploration expenditures. The Company plans to meet these future capital requirements with funds from cash flow, increased debt, asset disposals, and subsequent equity issues.

Production is currently at a level needed to provide sufficient cash flow to sustain current operations, administrative costs, and bank debt interest and payments. The Company anticipates fully utilizing its bank credit facility to meet its fourth quarter capital commitments.

The Company has filed its complete financial statements and related Management Discussion and Analysis for the quarter ended September 30, 2006 with Canadian securities regulatory authorities on SEDAR. This information may be accessed electronically at

Operational Review to September 30, 2006

Wells drilled in 2006 Gross Net Results

Antler 21 11.0 15 producing, 3 to be suspended,
2 D&A, 1 disposal

Paradise Valley 2 2.0 2 completed - to be tied in

North Esther 1 1.0 1 completed - to be tied in

Richdale 1 1.0 1 completed - to be abandoned
due to a Vent Flow

Retlaw 1 1.0 Drilling in progress

Leahurst 1 0.5 1 D&A

Total 27 16.5 Net success rate = 73%


To September 30, 2006, Magnus has drilled 21 operated wells (11.0 net) into a new light oil field in the south Antler area of which fifteen wells have been successfully completed in the Devonian Torquay Formation, three wells were completed and suspended, one well was drilled as a water disposal well and two wells were D&A. The major focus of the drilling program to date in the south Antler area has been to delineate the commercial limits of the Torquay pool. The oil production is sweet light oil (40 Degrees API), which commands a premium commodity price. In addition, netbacks are further improved by the Royalty and Tax incentives offered in Saskatchewan. The Company's wells in Antler are classified as Vertical Deep Oil wells and qualify for Royalty/Tax Incentive Volumes that range from approximately 50,000 to 100,000 barrels per well. Magnus has built a central oil battery in south Antler and is developing a gathering system to connect productive wells to this central processing facility, which will greatly improve production efficiency and reduce operating costs. The central battery was operational June 27, 2006.

The Company evaluated the production performance of the successful Torquay wells until the end of September. In this low gas-oil ratio, low pressure reservoir, it appears that vertical wells, properly stimulated with a fracture treatment, initially produce at rates from 50 to 70 barrels of oil per day and 40 to 80 barrels of water per day. The production from these wells declines rapidly due to lack of pressure support stabilizing at 10 to 20 barrels of oil per day with 10 to 40 barrels of water per day. Current production from Antler is 132 barrels of oil per day (66 barrels of oil per net). Based on these results, the Company proceeded with a horizontal well which was spudded on November 4 and rig released on November 13, 2006. The well has been completed (without a frac) and swabbing began on November 20, 2006. The stabilized production volumes from this horizontal well will determine the Company's future path of vertical versus horizontal drilling to develop the Torquay in Antler.

The Company has completed core and simulation work on the waterflood that we anticipate commissioning for this low gas-oil ratio, low pressure reservoir in 2007. Other companies in this Torquay pool have started waterflood pilot projects, examining both vertical wells and horizontal wells. The potential of waterflooding this field looks very promising, which could significantly increase production and reserves. Current estimates of recovery factors for the Torquay are 7% to 10% based on primary production and up to 30% for secondary recovery by conventional waterflooding.

On Company lands currently mapped within the inner portion of the Torquay oil field, the Company has an inventory of Torquay drilling locations estimated by management at more than 136 gross vertical wells (78 net) or 68 horizontal wells (39 net) depending upon the results of our first horizontal well. The management of the Company anticipates Antler to be a major area of exploration and development for Magnus in 2007 and beyond.

Paradise Valley

To date, in Paradise Valley in East Central Alberta, Magnus has drilled, cased and completed eight operated wells (8.0 net), purchased three (2.9 net) suspended wells (and associated land) and farmed in on four additional sections gaining four suspended wells (4.0 net). To date, Magnus has tied in eight of the operated wells, one of the purchased wells and two of the farmin suspended wells for a total of 11 wells tied in.

In addition, Magnus has 41 square kilometres of 3D seismic, 31 kilometres of 2D seismic and 11,840 gross acres of land to explore in the area. The Company's 100% owned infrastructure, to which eleven of the Company's wells are now connected, consists of a compressor, dehydrator, inlet separation, 37 kilometres of gathering system and a 6.4 kilometre sales line.

Current production in Paradise Valley is 1.0 MMCF/d (167 BOE per day). It is the goal of Magnus to cautiously move forward, filling up and then keeping the infrastructure fully utilized at 2.0 MMCF/d, by drilling additional gas prospects from an extensive inventory of locations in the area. Geological targets are 450 to 650 metres deep and include the Base Fish Scales, Viking, Colony and McLaren zones.

KVR Resources Properties

KVR Resources Ltd. ("KVR") was acquired on January 31, 2006 based on production of 65 BOE per day with an estimated 250 BOE per day waiting to be tied in. Successful optimization and development of the properties has surpassed expectations bringing the total daily production from properties acquired through the KVR acquisition to approximately 367 BOE per day as of November 21, 2006. The Company will continue to exploit these properties with additional drilling planned for 2007 particularly in Retlaw where the Company estimates that there are a further 10 to 15 gross (9.3 to 13.8 net) Sunburst locations on the Company's lands based on 40 acre spacing.

Kakwa Exploration Prospect

Magnus is pleased to be participating with Vigilant Exploration Inc. ("Vigilant") in an exploration prospect in the Kakwa area in the deep basin of western Alberta. The Kakwa area is characterized by wells which have multi-zone potential with long life condensate-rich gas reserves.

Magnus is participating with Vigilant on a straight-up basis on a farmin arrangement involving two major producing companies with Magnus paying 50% of the costs to earn a 50% BPO working interest and a 30% APO working interest. Magnus also earns a similar working interest in an offsetting section, together with the right to participate in follow-up opportunities. The first well is located at 01- 30 -062-05 W6M. The 01-30 well spudded on November 3, 2006. This well will take approximately 34 days to reach TD in the Nikanassin at 3200 metres and will target several prospective zones including the Cadomin, Gething, Bluesky, Fahler, Cadotte, Dunvegan, and Cardium, all of which are productive within a 10 kilometre radius of the target location. The typical reserves for a productive well in the area are 5 to 8 BCF on a proved plus probable basis. Average sales gas production from successful wells is 2.6 MMSCF per day (433 BOED) usually from two zones combined (with condensate rates up to 30 bbls per MMSCF for wells successful in the Bluesky). The success rate of Vigilant to date has been 92% (11 for 12 wells).

Gross capital costs are estimated to be $2.6 million to drill and case, $1.9 million to complete based on completion of three zones and $0.8 million to equip and tie-in. The costs for Vigilant's last four wells have been within 10% of the AFE'd amount. Given an all-in onstream cost of $5.3 million gross, this equates to an onstream cost before payout of $12,240 per BOE per day based on a well producing 2.6 MMSCF per day and a finding and development cost before payout of $6.36 per BOE based on reserves of 5.0 BCF proved plus probable.

Infrastructure is readily accessible with a tie-in point 1.6 kilometres away which provides access to the Cutbank and Musreau gas plants. Processing costs are reasonable at $0.39 per MCF for dehydration, processing, compression and transportation.

The Company is pleased with this new joint venture in the Kakwa area. This project enables Magnus to complete its flow-through obligations for the 2006 year in a fashion that has manageable risk and a high impact in terms of potential production and long life natural gas reserves.


Magnus is optimistic that the projects currently underway, such as the horizontal well at Antler, the development at Retlaw and the exploration well at Kakwa, will add production and reserves. At this time, these amounts cannot be accurately quantified so there is a likelihood that the Company may not meet its previously announced 2006 exit rate of 900 BOE per day. However, the Company is well positioned to continue to grow the Company's reserves, production and cash flow per share. At this time Magnus has an overall inventory of more than 370 gross (233 net) drilling locations on a focused land base of approximately 143,700 gross (95,800 net) acres of freehold and crown land. This provides the Company with a development drilling inventory in its key operated project areas of more than five years.

The KVR acquisition is proving to be better than expected, particularly in Retlaw, generating cash flow and many additional opportunities, while the Company's acreage at Antler gives the Company a platform for tremendous organic growth. The Company will continue to evaluate its Antler wells including the new horizontal well and will continue to optimize production from all of our properties through the fourth quarter, 2006.

Since inception, Magnus has drilled 42 gross wells (29.5 net wells) with a 75% success rate (31 capable of production, 5 D&A, 5 suspended and 1 water disposal well), and based upon the independent reserves evaluation prepared by GLJ Petroleum Consultants, as of September 30, 2006, Magnus has 2,061 MBOE of proven plus probable reserves in total. Thus, in the initial fifteen months of the Company's existence, the business plan has progressed well and our focus will continue to be the creation of shareholder value through the exploration and development of our land base where we will continue to steadily add production and reserves.

About Magnus Energy

Magnus is a junior oil and gas company focused on the acquisition, exploration, exploitation and development of oil and natural gas properties in Western Canada.


This press release includes forward-looking statements and assumptions respecting the Company's strategies, future operations, expected financial results, financial sources, commodity prices, costs of production and quantum of oil and natural gas reserves and discusses certain issues, risks and uncertainties that can be expected to impact on any of such matters. By their nature, forward-looking statements are subject to numerous risks and uncertainties that can significantly affect future results. Actual future results may differ materially from those assumed or described in such forward-looking statements as a result of the impact of issues, risks and uncertainties whether described herein or not, which the Company may not be able to control. The reader is therefore cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any intention or obligation to update or revise these forward-looking statements, as a result of new information future events or otherwise. In addition, the term BOE or BOE's may be misleading, particularly if used in isolation. A BOE (barrel of oil equivalent) conversion ratio of 6 Mcf per one (1) BOE is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

37,215,703 Class A Shares

1,044,000 Class B Shares

The TSX Venture Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this release and has neither approved nor disapproved the contents of this release.

Contact Information

  • Magnus Energy Inc.
    Murray M. Stewart
    President and Chief Executive Officer
    (403) 233-4963
    (403) 262-9920 (FAX)
    Magnus Energy Inc.
    Stewart Larsen
    Chief Financial Officer
    (403) 233-4960
    (403) 262-9920 (FAX)
    Magnus Energy Inc.
    Suite 1650, AMEC Place
    801 - 6th Avenue S.W.
    Calgary, Alberta T2P 3W2