Mahalo Energy Ltd.
TSX : CBM

Mahalo Energy Ltd.

August 14, 2008 18:12 ET

Mahalo Announces Second Quarter 2008 Results

CALGARY, ALBERTA--(Marketwire - Aug. 14, 2008) -

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Mahalo Energy Ltd. ("Mahalo" or the "Company") (TSX:CBM) announces its results for the three and six months ended June 30, 2008.



Summary of Results Three Months Ended Six Months Ended
June 30 June 30
% %
2008 2007 Change 2008 2007 Change
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Financial ($000's except
per share)
Petroleum and natural gas
revenue 16,233 10,871 49% 29,651 21,303 39%
Operating netback (1) 9,461 5,378 76% 16,887 11,458 47%
Net income (loss) (31,503) (171) (31,998) (1,207)
Per share - basic &
diluted (0.53) 0.00 (0.54) (0.02)
Funds from operations (1) 6,369 3,545 80% 11,740 7,038 67%
Per share - basic (1) 0.11 0.06 0.20 0.12
Capital expenditures 13,637 13,364 2% 22,144 22,183 0%
Proceeds from sale of oil
and gas assets - 91 - 14,274
Net debt, end of period
(1) 67,451 52,038 30% 67,451 52,038 30%

Operational
Average daily sales
volumes (boe) (1) 3,283 2,805 17% 3,343 2,715 23%
Average selling price
($/boe) 54.34 42.58 28% 48.74 43.35 12%
Operating netback ($/boe) 31.67 21.06 50% 27.76 23.32 19%
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(1) Refer to advisories regarding non-GAAP financial measures and barrel of
oil equivalent ("boe") measures at the end of the MD&A.


Q2 2008 Highlights

- Increased funds from operations by 80% over second quarter 2007.

- Increased operating netback by 76% over second quarter 2007.

- Increased operating netback per unit by 50% over second quarter 2007 while average selling price per unit increased 28% over the same period.

- Locked in a number of forward physical sales contracts at prices in excess of US $10.00 per MMbtu.

- Drilled 14 (8.57net) successful coal bed methane wells in the United States.

- Announced intention to sell Canadian resource assets; focus on United States Coalbed Methane and Shale assets and opportunities.

- Closed new US $105 million four-year committed credit facility.

- Appointed Senior Vice-President, US Exploration, a Vice-President, US Land, and a Controller to Mahalo's senior management team.

Financial

During the three months ended June 30, 2008, the Company generated funds from operations of $6.4 million on sales revenues of $16.2 million. During this period, Mahalo recorded a net loss of $31.5 million. The comparability of the Company's net earnings in the three and six months ended June 30, 2008 with the corresponding periods of 2007 was significantly impacted by a $32.3 million write-down of Canadian property and equipment as more fully discussed in the Company's MD&A. Mahalo is currently in the process of disposing of a significant portion of its Canadian resource assets. The non-cash write-down reduced current earnings but did not impact funds from operations.

Corporate

The second quarter of 2008 saw a number of dramatic changes for Mahalo. On May 21, 2008, the Company announced a decision to pursue the sale of its Canadian resource assets and focus on its United States coal bed methane ("CBM") and shale gas assets and opportunities. During the quarter, the Company was also successful in recruiting a number of highly qualified professionals for its Tulsa management team; this will be of significant benefit as it ramps up its CBM drilling and pursues further shale gas program initiatives. On June 30, 2008, the Company closed a new US$ 105 million, long term credit facility, replacing its existing $75 million facility which was due to expire in early 2009. Mahalo believes that the new credit facility will provide a more balanced capital structure and allow increased flexibility for the Company to execute its business plan and continue to achieve positive results for its shareholders.

Mahalo has decided to retain certain Canadian CBM properties, including its primary Mannville property at Corbett Creek, Alberta. Mahalo believes that the Canadian Mannville coals hold significant potential; the Company will continue to develop and test concepts and techniques to unlock this huge unconventional resource. The sales of all other Canadian assets, primarily conventional oil and gas properties, are well underway with a number of letters of intent having been signed. The disposition of certain other minor assets is still being negotiated. The Company is confident that with the completion of these asset sales, the transition to a firmly focused unconventional natural gas company with improved financial flexibility will have been achieved.

The Company has added three key individuals to lead its United States operation. Mr. Patrick Ryan has joined our team as Senior Vice-President, Exploration and General Manager, US Operations. Mr. Ryan (B.S. Geology, M.S. Geology, and MBA) has over 30 years of oil and gas experience with a majority in the Mid-Continent area of the United States. Most recently, he was heavily involved in Woodford Shale development in the Arkoma Basin with Newfield Exploration. Mahalo is excited about the strong technical attributes that he brings to our Company. In addition, Mr. Sam Gordin has joined our team as Vice President, US Land and Business Development and Kevin Humphrey CPA joined us as Controller US Operations. The Company is in the process of further strengthening the team in the Tulsa office with other key individuals. The addition of these highly experienced and qualified individuals sets the stage for Mahalo to move quickly to evaluate and develop its shale gas resources.

The Company also established a new, four year US $105 million credit facility with Ableco Finance LLC. The new facility is composed of a US $65 million revolving credit facility (with an initial borrowing base set at US $50 million), a US $25 million term facility (fully funded at closing), and a US $15 million delay draw term facility. Mahalo intends to use the enhanced flexibility offered by the new facility to help fund future development initiatives and acquisitions.

Operational

The Company participated in drilling a total of 15 (9.57 net) wells of which 1 (1.0 net) well was in Canada and 14 (8.57 net) wells were in the United States. The Company enjoyed a 100 percent success rate and all are gas wells. Total capital investment for the quarter of $13.6 million included $2.2 million for land, $1.0 million for seismic, $8.9 million for drilling and completions and $1.5 million for facilities and production equipment.

Sales of oil and gas averaged 3,283 boe per day during second quarter 2008 compared with 3,403 boe per day in first quarter 2008. The reduction was caused by high decline gas wells in Canada; production from United States operations was generally stable over the period. The potential sale of the Canadian operations and resulting curtailed capital investment in new wells during the quarter resulted in an overall decline in Canadian production. One successful gas well was drilled in Canada; however, the well has not been fracture stimulated or tied in.

The Hartshorne CBM play that Mahalo is developing in the Arkoma basin of Oklahoma continues to yield impressive results with each well showing gas production very soon after initial completion and production rates rapidly rising to expected levels. The Company has also managed to keep capital costs per well within planned amounts. New volumes brought on stream in the United States through CBM drilling did not result in increased overall production for the quarter due to a number of factors. Extremely hot weather played a role in production disruption as all Oklahoma operators had difficulty maintaining normal run time due to compression overheating issues. CBM production is by nature very pressure sensitive, and as such, compression down time had a major disruptive effect on overall volumes. Compressor issues were felt in both Mahalo field compression as well as major mid-stream providers that Mahalo uses to transport gas to the Henry Hub.

In addition to down time, Mahalo has identified gathering system issues that need to be rectified. Many new wells achieved rates well over prognosis which was confirmation of the positive economics of the play. These same wells, however, also caused hydraulic inefficiencies in our gathering lines and as such have suppressed older and more pressure sensitive production. Mahalo has commenced a full coupled reservoir and gathering system modeling project that should alleviate the issues at hand and prevent major issues in the future.

Finally, Mahalo has begun an aggressive re-entry program whereby new horizontal laterals are being added to existing wells. The average cost to drill and case a new lateral has been less than $0.4 million which greatly increases the value of new wells due to lower capital costs. To prepare for these activities, Mahalo will have approximately 4 wells shut in and prepared for re-entry at any point in time that would account for additional deferred production. In total, from all these issues, the Company estimates that there is at present approximately 3.0 Mmcf per day of production net to Mahalo which has been deferred. It is important to note that this production should be fully recoverable in the near future and in no way compromises the Company's reserve volumes. Detailed study of these issues and remedial action is well underway to allow recovery of these production volumes, but the precise timing of such recovery remains uncertain.

Outlook

Mahalo has spent considerable time and effort evaluating the potential of its significant shale gas resource; a 2006 Contingent Resource Study by Sproule and Associates Ltd. estimated Mahalo interest discovered resource at approximately 3.5 trillion cubic feet. With the addition of key individuals with vast operational experience in shale gas evaluation and development, the Company will commence a shale gas pilot program in the third quarter of 2008. This program will include further land acquisition, seismic, the drilling of three wells and the evaluation of several advanced completion techniques. The Company will follow up with a continuing program of drilling and evaluation that will be scaled appropriately depending on the results of the initial pilot program.

As well, the Company will continue with its highly successful CBM drilling program with one to two rigs running continuously in Oklahoma. With the sale of the Canadian assets, a new focus on Caney and Woodford shale gas development and continuing CBM development, the Company looks forward to growing production and strong economic returns from a focused approach to unconventional gas development in the United States.

Additional Information

Mahalo's has filed its unaudited consolidated financial statements and related managements' discussion and analysis for the three and six months ended June 30, 2008 on SEDAR. The reports can be accessed electronically from the SEDAR system at www.sedar.com. For additional information on the Company, please go to the Company's profile on SEDAR or the Company's website at www.mahaloenergy.com

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.

ADVISORIES

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 are expressly qualified by this cautionary statement. 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". 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. These non-GAAP measures 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. The non-GAAP financial measures, as calculated and used by the Company, may not be comparable to similarly titled measures reported by other companies.

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 service debt.

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. There is no GAAP measure that is reasonably comparable to operating netback as calculated by the Company.

Net debt as calculated by the Company represents long-term debt, less working capital (excluding unrealized gain or loss on financial instruments) and is used by the Company to assess financial strength. There is no GAAP measure that is reasonable comparable to net debt as calculated by the Company.

Management considers these non-GAAP financial 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 certain research analysts to value and compare oil and gas exploration and production companies, and are frequently included in published research when providing investment recommendations.

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.

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)
    or
    Mahalo Energy Ltd.
    Bill Gallacher
    Chairman of the Board
    (403) 233-4451
    or
    Mahalo Energy Ltd.
    James Burns
    COO
    (403) 716-3110
    (403) 451-3501 (FAX)
    or
    Mahalo Energy Ltd.
    540, 734 - 7th Avenue SW
    Calgary, Alberta T2P 3P8
    (403) 451-3500
    (403) 451-3501 (FAX)