Mahalo Energy Ltd.

Mahalo Energy Ltd.

March 27, 2008 17:41 ET

Mahalo Announces Financial and Operational Results for 2007

CALGARY, ALBERTA--(Marketwire - March 27, 2008) -


Mahalo Energy Ltd. (TSX:CBM) ("Mahalo" or the "Company") announces its financial and operating results for the year ended December 31, 2007.

Summary of Results 2007 2006

Financial ($000's except per share)
Petroleum and natural gas revenue 44,146 39,551
Operating netback (1) 22,730 20,153
Net income (loss) (3,717) (48,566)
Per share - basic & diluted (0.06) (0.93)
Funds from operations (1) 13,537 12,893
Per share - basic (1) 0.23 0.25
Capital expenditures 41,489 65,852
Property and other acquisitions (2) 2,800 90,651
Proceeds from sale of oil and gas assets 30,698 27,577
Long-term debt, end of period 51,334 52,349
Shareholders' equity, end of year 115,249 116,763

Operational (1)
Average daily sales volumes (boe/day) 3,098 2,478
Average selling price ($/boe) 39.04 43.73
Average operating netback ($/boe) 20.10 22.28
(1) Refer to advisory regarding non-GAAP financial measures.
(2) Property and other acquisitions include deemed value of non-cash

2007 Highlights

- Drilled 54 (32.4 net) CBM, shale and natural gas wells with a 95 per cent success rate.

- Increased average daily production by 25 per cent to 3,098 boe from 2,478 boe in 2006, despite non-core property sales of 500 boe per day.

- Realized a net increase of 3.9 million boe or 35 per cent in proved plus probable reserves to 14.9 million boe from 11.0 million boe at year-end 2006. Proved reserves increased by 2.8 million boe or 52 per cent to 10.4 million boe.

- Achieved F&D costs (including all future development capital, but excluding acquisitions and divestures) of $10.63 and $9.09 per boe on a proved reserves and a proved plus probable reserves basis, respectively. Including acquisitions and divestures, F&D costs were $5.63 and $4.95 per boe, respectively.

- Realized reserve replacement ratio of 3.4 times and a reserve life index of 13.2 years based on proved plus probable reserves and 2007 sales volumes.

- Achieved operating netback recycle ratio of 2.2 times on a proved plus probable reserves basis.

- Realized $30.7 million from non-core asset sales in 2007.


During 2007, the Company generated funds from operations of $13.5 million on sales revenues of $44.1 million and recorded a loss of $3.7 million in an environment of continued low natural gas prices. Earnings in 2006 were impacted significantly by non-cash charges including a $36.3 million ceiling test write-down of Canadian property and equipment and a $12.7 million write-down of goodwill. The Company did not experience any write-downs in 2007.


The Company's fourth quarter 2007 sales volumes averaged 3,542 boe per day, despite the disposition earlier in 2007 of certain higher cost, non-core conventional oil and gas properties producing approximately 500 boe per day. In comparison, fourth quarter 2006 sales volumes averaged 2,972 boe per day. Successful exploration and development again played a key role in 2007; sales volumes also benefited from expansion of the Kayla West pipeline system allowing for tie-in of several previously constrained Hartshorne CBM wells. The expanded pipeline facility will also support future development of numerous Hartshorne CBM prospects.

During 2007, the Company drilled 54 (32.4 net) oil and gas wells, of which 51 (30.9 net) were capable of hydrocarbon production. Of the latter wells, 15 (10.9 net) were in Canada and 36 (20.0 net) were in the United States. This represents a 95 per cent success rate.

The Company's Hartshorne CBM drilling success continued in 2007, including the introduction of multi-lateral horizontal wells to more rapidly and efficiently desorb and dewater the coal. Mahalo also drilled some shale wells in the United States as well as Mannville CBM and seismically determined conventional prospects in Canada. During this period, the Company also moved into an active operator role on a portion of its drilling program, bringing a better balance to its overall resource management, while continuing to benefit from a close association with joint venture partners and other operators.

In Canada, Mahalo focused its 2007 CBM efforts on one property, namely Corbett Creek, to gain a better understanding of the Mannville coal. The conversion of single lateral horizontal wells to multi-laterals with up to three legs proved to be of benefit, noticeably reducing dewatering time and improving well production capability.

Mahalo continues to work diligently to further develop, test and prove various concepts related to successful exploitation of Woodford and Caney shale. The Company is highly encouraged by its study of production profiles associated with its own Caney shale wells. Although initial Caney production rates tend to be lower, decline rates are less rapid. This could potentially result in more comparable production rates in the longer term and similar economic returns over the life of a Caney well relative to what more mature, developed "sister shale" projects have suggested to date.

The Company's interest in gross proved plus probable oil and gas reserves (before deduction of royalties), based on an independent engineering report prepared by Netherland, Sewell and Associates, Inc. as at December 31, 2007, amounted to 14.9 million boe, up 35 per cent from the 11.0 million boe reported by Mahalo as at December 31, 2006. The net increase of 3.9 million boe included additions of 5.8 million boe, acquisitions of 0.5 million boe, divestures of 1.3 million boe and production of 1.1 million boe. Gross proved reserves (before deduction of royalties) increased by 52 per cent to 10.4 million boe as at December 31, 2007 from the reported 6.9 million boe a year earlier. A majority of the Company's 2007 reserve additions occurred in the Lakeview field in Oklahoma.

Mahalo's success in 2007 is reflected in a number of ratios and other measures utilizing the gross reserve quantities as determined by Netherland Sewell. Finding and development costs, calculated in accordance with NI 51-101 standards and including all future development capital, amounted to $10.63 per boe on a proved reserves basis and $9.09 per boe on a proved plus probable reserves basis. Including acquisitions and divestures, finding and development costs were $5.63 per boe and $4.95 per boe, respectively. The proved plus probable recycle ratio was 2.2 based on the Company's average operating netback of $20.10 per boe in 2007 and the finding and development cost of $9.09 per boe as discussed above. The reserve life index, utilizing 2007 sales volumes, was 9.2 years and 13.2 years on a proved and a proved plus probable basis, respectively. The reserve replacement ratio, utilizing year-end proved plus probable reserves, is 3.4 times 2007 sales volume. We believe that these finding and development costs and other measures place Mahalo in the upper echelon of the industry for investment efficiency.


Mahalo currently anticipates generating funds from operations of approximately $30 million in 2008. This assumes we realize an average natural gas price of Cdn $7.60 per Mcf and are successful in achieving an average daily sales volume of 4,050 boe per day in 2008. Although natural gas prices have shown considerable strength of recent, we also know that they will fluctuate and remain highly unpredictable. Consequently, we have built an appropriate level of flexibility into our 2008 spending plans.

Capital spending on land, seismic and drilling is currently set at $41 million for 2008. Mahalo expects to fund its 2008 capital spending program with funds from operations, proceeds from further asset rationalization and bank debt. Our program, which is focused on unconventional, includes drilling approximately 42 (net) Hartshorne CBM development wells. Our 2008 United States program will also include seismic to improve CBM and shale drilling co-ordinates. In Canada, we plan to re-enter a number of Mannville CBM wells at Corbett Creek and perform further multi-lateral work; this concept has proved highly beneficial in expediting de-watering of the coal and increasing well productivity. In addition, we look forward to undertaking some Horseshoe Canyon CBM development at Joffre as well as selective development on certain seismically defined conventional oil and gas prospects. The 2008 capital spending program is based on expectations involving sales volumes, realized commodity prices, operating netbacks and other matters and is therefore subject to modification as the year unfolds.

In addition to conducting 3D seismic and drilling vertical and horizontal shale wells, Mahalo continues to utilize valuable insights involving shale mineralogy and gas content, as contained in its 2006 contingent resource study, to prioritize and plan shale development. Pursuit of Caney and Woodford Shale is exciting in that both have consistently demonstrated a high level of gas charge. As previously stated, our shale resource is large but also capital intensive to exploit. Mahalo will ultimately pursue more consistent shale development through selectively developing high gas in place sections close to infrastructure and/or inviting a partner into our lands. Mahalo is confident that appropriate allocation of capital towards shale development will significantly benefit future production and reserves. In the interim, Mahalo is also committed in its endeavor to capture more Hartshorne CBM acreage which will help grow production and reserves.

Our people have created a tremendous inventory of solid growth prospects that compliment our already existing portfolio of resource assets. Our financial capability is however not unlimited and so we will continually look to prioritize our prospect inventory and augment our financial capability through rationalization of our existing asset base.

Additional Information

Mahalo has filed its Audited Consolidated Financial Statements, Managements' Discussion and Analysis and Annual Information Form (which contains 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

Except for historical financial information contained herein, the matters discussed in this document may be considered forward-looking statements. 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. The forward-looking statements contained in this document are made as of the date hereof and Mahalo undertakes no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless so required by law.

Non-GAAP financial measures

The Company uses and makes reference to "funds from operations", "funds from operations per share", "operating netback" and "net debt" in this document. These terms do not have any standardized meaning, are not defined under Canadian Generally Accepted Accounting Principles ("GAAP") and are therefore referred to as non-GAAP financial measures. The non-GAAP financial measures, as calculated and used by the Company, may not be comparable to similarly titled measures reported by other companies.

Management considers these non-GAAP measures as useful supplemental measures to analyze operations, compare performance between periods and provide shareholders and potential investors with additional information. These non-GAAP measures are also used by research analysts to value and compare oil and gas exploration and production companies, and are frequently included in published research when providing investment recommendations.

Funds from operations and funds from operations per share should not be considered as an alternative to, or more meaningful than net earnings, cash provided by operating, financing and investing activities or other measures of financial performance or liquidity calculated in accordance with Canadian GAAP. Funds from operations represent cash from operating activities before change in related non-cash working capital. Funds from operations per share are calculated using the weighted average shares outstanding, consistent with the calculation of earnings per share. These measures are used by Mahalo to assess its operating results and its ability to generate funds to finance future capital investments and to service debt.

Operating netback should not be considered an alternative to, or more meaningful than, net earnings or other measures of performance or liquidity calculated in accordance with Canadian GAAP. Operating netback presents a measure of net oil and gas revenue relative to realized commodity prices by deducting royalties and operating and transportation costs from oil and gas sales revenues. This non-GAAP measure is also used by the Company to assess comparability of petroleum sales and directly related costs between periods.

Barrel of oil equivalent ("boe") volumetric measures

The oil and gas industry commonly expresses production, sales and reserves volumes on a barrel of oil equivalent ("boe") basis whereby natural gas volumes are converted at a ratio of six thousand cubic feet ("Mcf") to one barrel ("bbl") of crude oil. The boe measure is used by the Company to aggregate oil and gas volumes. The measure is also considered to be useful for comparisons with other industry participants. The conversion ratio is based on an approximate energy equivalency of these commodities at the burner tip and does not represent a value equivalency at the well head. This conversion may therefore be misleading, particularly if used in isolation.

Reserves information

Some of the information in this document summarizes information contained in the Netherland Sewell & Associates, Inc. 2007 reserves report. The Company will provide additional information regarding reserves in its Annual Information Form and other filings. The Company's oil and gas reserves volumes provided herein are estimates only and there is no guarantee that the estimated reserves will be recovered. The actual oil and 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.
    Duncan Chisholm
    President & CEO
    (403) 716-3114
    (403) 451-3501 (FAX)
    Mahalo Energy Ltd.
    Bill Gallacher
    Chairman of the Board
    (403) 233-4451
    Mahalo Energy Ltd.
    540, 734 - 7th Avenue SW
    Calgary, Alberta T2P 3P8
    (403) 451-3500
    (403) 451-3501 (FAX)