Mahalo Energy Ltd.

Mahalo Energy Ltd.

April 02, 2007 12:14 ET

Mahalo Announces Financial and Operational Results for 2006

CALGARY, ALBERTA--(CCNMatthews - April 2, 2007) -

(Not for distribution to U.S. newswire services or dissemination in the United States. Any failure to comply with this restriction may constitute a violation of U.S. securities law.)

Mahalo Energy Ltd. (TSX:CBM)("Mahalo" or the "Company") announces its financial and operating results for the year ended December 31, 2006.

Summary of Results

Years ended December 31, 2006 2005

Financial ($000's except per share)
Petroleum and natural gas revenue 39,551 13,385
Operating netback (1) 20,153 8,626
Net income (loss) (48,566) (1,010)
Per share - basic & diluted (0.93) (0.03)
Funds from operations (1) 12,893 6,564
Per share - basic (1) 0.25 0.22
Capital expenditures (2) 125,285 88,966
Proceeds from sale of oil and gas assets 27,577 -
Long-term debt, end of period 52,349 3,483
Shareholders' equity, end of year 116,764 84,804

Average daily sales volumes (boe) (1) 2,478 603
Average selling price ($/boe) 43.73 60.85
Operating netback ($/boe) 22.28 39.21
(1) Refer to advisory regarding non-GAAP financial measures.
(2) Corporate and property acquisitions include deemed value of non-cash


- Increased average daily production by 310% to 2,478 boe from 603 boe in 2005.

- Realized 95% higher cash flow of $12.9 million compared with $6.6 million in 2005.

- Realized 77% increase in year-end proved reserves; 6.9 MMBoe from 3.9 MMBoe at year-end 2005.

- Received upward revision of over 1.5 MMBoe on previously booked proved US reserves based on additional CBM production history.

- Conducted late year successful delineation drilling at Lakeview with multiple Hartshorne coal wells producing greater than 775 Mcf per day.

- Received limited credit for recent Lakeview drills in 2006 reserves report - additional production history required; a common issue with CBM wells.

- Released results of third party Contingent Resource Study on selected lands quantifying Mahalo interest gas in discovered gas resource of over 3.9 TCF (best estimate).

- Completed additional non-core asset sales of $14.6 million in 2007.

- Based on successful U.S. drilling, received increase in credit facility borrowing base to Cdn $60 million from Cdn $53 million.

- Currently flow-testing first US horizontal Woodford shale well - results are pending.


During 2006, the Company generated funds of $12.9 million on sales of $39.6 million and recorded a loss of $48.6 million in an environment of sharply lower realized natural gas prices. Although our 2006 average daily boe sales volume was close to our original expectation, lower prices reduced anticipated funds from operations by approximately $15 million.

The comparability of the Company's 2006 earnings with 2005 was impacted significantly by one-time, non-cash charges in the fourth quarter. The charges included a $36.3 million ceiling test write-down of Canadian property and equipment and a $12.7 million write-down of goodwill. The write-downs do not impact current or future funds from operations, but did reduce earnings.

Under full cost accounting, a ceiling test write-down occurs if the net capitalized costs of oil and gas properties, which are subject to depletion, exceed the estimated undiscounted future net cash flows from proved reserves on a country-by-country basis using projected commodity prices and costs. A majority of the Company's ceiling test write-down was due to the impact of lower projected natural gas prices on Canadian conventional resource property assets. Subsequent to the year-end, Mahalo sold additional conventional oil and gas properties. In the United States, the Company had significant room under its full cost ceiling test at year-end 2006.


The Company exited calendar 2006 with aggregate daily sales of approximately 3,000 boe; primarily CBM natural gas. We currently estimate that approximately 500 boe per day, net to Mahalo, is being held behind pipe from several Hartshorne CBM wells in the United States. We are currently installing a big inch gathering system and compression facilities to correct this situation. The project should be completed by mid 2007.

Mahalo participated in 132 (54.2 net) wells in 2006, including 44 (20.8 net) unconventional gas wells in Canada and 83 (28.5) unconventional gas wells in the United States. The Company's overall drilling success rate in 2006 was 97 per cent. The Company endeavored to conduct a majority of its 2006 drilling activity in the first half of the year. In Canada, most of the Canadian program was drilled in first quarter to take advantage of frozen ground and in certain cases, to retain rights to highly prospective acreage. With the benefit of hindsight, less Canadian drilling activity might have been prudent given the softening of natural gas prices further into the year.

In fourth quarter 2006, the Company shifted its focus to US drilling in light of drilling successes and more robust economics in this lower gas price environment. Mahalo executed a large drilling program in the Hartshorne coal in the Lakeview area, which was significantly more successful than expected. The Company has achieved basin leading rates on new CBM wells in Lakeview, and continues to produce wells at top quartile rates; one well has been producing at over 2.0 MMcf per day on a continuous basis since October 2006.

Mahalo is reassessing its approach to Canadian Mannville coals. The Company remains confident that horizontal drilling, which has been key to United States CBM success, will continue to be central to economically unlocking the Mannville. At the same time, the Company has determined that the Mannville has significantly different characteristics than the Hartshorne. We now see the need for multi-lateral horizontal wells to more rapidly and efficiently desorb and dewater the coal and thereby expedite cash flow and return on capital.

CBM exploitation in Canada, unlike our experience in the United States, will involve a steeper learning curve; additional research and development will be required to get it right, but we are not deterred. Mahalo intends to better accomplish this by focusing on one property, namely Corbett Creek. Corbett provides an excellent opportunity to further decipher key differences between Mannville and Hartshorne coals; at the same time, the Company will benefit from excellent infrastructure that is already in place in this field.

The Company's "all in" FD&A, including future development capital, but excluding capital associated with unproved properties (i.e. shale), was approximately $29.00 per boe on a proved basis in 2006. A number of factors contributed to this result; the two most material were the inability to book Canadian Mannville CBM reserves on step out plays drilled to date, and the lag time recognizing reserves on the drilling of Lakeview CBM wells pending adequate production history. The large revision to proved reserves that Mahalo received in 2006 on CBM wells drilled in 2005 demonstrates a pattern common to unconventional drilling and related reserves determination.

Currently, the average proved reserves attributed to the fourth quarter Lakeview wells are 26 MBoe per well (gross) and on a proved plus probable basis, 36 MBoe per well (gross). Based on these reserve numbers, the proved reserve life index on these Lakeview wells would compute at 1.17 years which clearly is not congruent with Hartshorne wells in the basin. Even with this conservatism, proved plus probable F&D at Lakeview remained reasonable at approximately $15.75 per boe. Mahalo fully expects a large positive revision on Lakeview CBM reserves in 2007 as a result of 2007 production performance.

We continue to work diligently along side many other United States exploration and development companies to further develop, test and prove various concepts related to successful exploitation of Woodford and Caney shale. We continue to witness improved shale gas stimulation results through our involvement with other industry operators. Mahalo is also gathering valuable data, through its own 3-D seismic and vertical drilling efforts. At the time of writing this message, the Company is involved in the drilling and completion of a Woodford Shale horizontal well, results of which will be forthcoming in the next few weeks.

While we are pleased with our 2006 results, Mahalo, along with other junior producers heavily weighted to natural gas, found 2006 to be a financially challenging year. Warm winter temperatures and gas inventory buildups put significant downward pressure on natural gas prices. Although natural gas prices have shown some strength in 2007, they are expected to remain volatile and highly unpredictable as markets react rapidly to news events, weather forecasts and natural gas inventory level reports.


Mahalo will continue to direct a majority of its near and medium term capital towards United States CBM development. Recent and past success, more robust economics and the large number of readily drillable locations clearly favor continued Hartshorne CBM development. It also offers the greatest opportunity to maximize cash flow in the current gas pricing environment.

Mahalo plans to drill 18 (8.6 net) additional Hartshorne wells in Q2, and an additional 38 (15.2 net) in the balance of 2007. In addition, facilities debottlenecking will continue so that back pressure problems can be alleviated.

In addition, Mahalo will continue its work on the Woodford and Caney shales with a number of new operations. Significant progress has been made on understanding these shales, specifically in terms of completion technique, and the Woodford shale has shown enormous increases in various operators' reported production rates in 2006. These shales, as evidenced in the previously released Contingent Resource Study, give the Company an opportunity to unlock substantial new gas reserves in the future.

Additional Information

Mahalo has filed its Audited Consolidated Financial Statements, Managements' Discussion and Analysis and Annual Information Form (which contains annual National Instrument 51-101 F1, F2 and F3 Information) on SEDAR. The reports can be accessed electronically from the SEDAR system at or from the Company's website at

Mahalo is a junior, unconventional natural gas producer, focusing on the development and production of coal bed methane and shale gas prospects in the United States and coal bed methane in Canada.


Forward-looking Statements - Certain matters discussed in this document may be considered forward-looking statements. Such statements include declarations regarding management's intent, belief or current expectations. Such statements include declarations regarding management's intent, belief or current expectations. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties; actual results could differ materially from those indicated by such forward-looking statements. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: (i) that the information is of a preliminary nature and may be subject to further adjustment, (ii) the possible unavailability of financing, (iii) risks related to the exploration and development of oil and gas properties, (iv) the impact of price fluctuations and the demand and pricing for oil and natural gas, (v) the seasonal nature of the business, (vi) start-up risks, (vii) general operating risks, (viii) dependence on third parties, (ix) changes in government regulation, (x) the effects of competition, (xi) dependence on senior management, (xii) impact of economic conditions, and (xiii) fluctuations in currency exchange rates and interest rates. Mahalo undertakes no obligation to update or revise any forward-looking statements, except as required by law.

Non-GAAP Financial Measures - The terms "funds from operations", "funds from operations per share" and "operating netback" are not recognized measures under Canadian Generally Accepted Accounting Principles ("GAAP") and are therefore referred to as non-GAAP financial measures. Funds from operations represent cash from operating activities before change in related non-cash working capital. Operating netbacks are calculated by subtracting royalties and operating and transportation costs from sales revenues. Management believes that these non-GAAP measures are useful supplemental measures to provide shareholders and potential investors with additional information regarding the Company's liquidity, operating performance and ability to generate funds to finance its operations. The Company's method of calculating these measures may differ from other companies and accordingly, they may not be comparable to measures used by other companies. These measures should not be construed as an alternative to net earnings, as determined in accordance with GAAP, as an indication of the Company's performance.

Barrel of Oil Equivalent Measures - Disclosure provided herein in respect of barrel of oil equivalent ("boe") units may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet of natural gas to one barrel of oil is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Reserves Information - Some of the information contained herein summarizes information contained in the Sproule Associates Limited 2006 reserves report. The Company will provide additional information regarding reserves in its 2006 Annual Information Form and other filings. The Company's crude oil, natural gas liquids and natural gas reserves 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.

The Toronto Stock Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this press release.

Contact Information

  • Mahalo Energy Ltd.
    540, 734 - 7th Avenue SW
    Calgary, Alberta T2P 3P8
    (403) 451-3500
    (403) 451-3501 (FAX)
    Mahalo Energy Ltd.
    Duncan Chisholm
    President & CEO
    (403) 716-3114
    (403) 451-3501 (FAX)
    Mahalo Energy Ltd.
    Bill Gallacher
    Chairman of the Board
    (403) 233-4451