Mahalo Energy Ltd.
TSX : CBM

Mahalo Energy Ltd.

October 14, 2005 16:07 ET

Mahalo Energy Enters Acquisition Agreement and Provides Drilling and Activities Update

CALGARY, ALBERTA--(CCNMatthews - Oct. 14, 2005) -

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Mahalo Energy Ltd. ("Mahalo" or the "Corporation") (TSX: CBM) is pleased to announce that it has now entered into a definitive Purchase and Sale Agreement to purchase land and producing assets in the Arkoma Basin, Oklahoma, USA and is pursuing the final round of due diligence with a private US energy company as previously announced on September 23, 2005. The effective date of the transaction will be August 1, 2005. The total consideration of USD $24,500,000 (less the cashflow from August 1, 2005 to close) consists of 59 percent cash and 41 percent equity. The seller has agreed to an escrow period on the share component of 9 to 12 months.

Mahalo has determined the amount of land is more than originally released, now upgraded to 185,000 gross acres (45,000 net acres). These lands have been tested and developed commercially for the Caney/Woodford shale and coalbed methane (CBM) horizons. The lands will create a new core area for Mahalo adjacent to the Corporation's existing fields in the area. Current net production of the property is approximately 3.75 mmcf/d (625 boe/d) and the acquisition includes 125 miles of 2D seismic data, company-owned water disposal wells, and adequate adjoining infrastructure. The land base has a significant number of drilling locations both for CBM and shale gas prospects along with multiple shale gas re-completion and tie-in candidates which will provide Mahalo with significant opportunities for both reserve and production additions over the foreseeable future. The Corporation expects to commence operations on the lands immediately after closing. The Corporation's proprietary drilling techniques, ample well data and sizeable seismic database accompanying this transaction, provide the Corporation with a high degree of confidence in the potential of these lands. Due to the relatively early stages of the producing wells, a third party reserve evaluation, subject to National Instrument 51-101 methodology, was only undertaken on the proved producing portion (PDP) of the reserves. The effective date of the reserve assessment was November 1, 2005 and the assignable PDP reserves were 263 mboe. Net undeveloped land has been valued at $300 USD per acre because of the highly prospective nature of shale and CBM resource plays in the area.

The closing of this transaction is expected to occur on November 3, 2005. The cash portion of the acquisition and balance of the 2005 capital program will be funded through existing cash-on-hand and through Mahalo's credit facility.

GMP Securities Ltd. is being retained to act as financial advisor for the acquisition.

Drilling and Activities Update

Mahalo and its partner Vectra CBM LLC have been drilling in Oklahoma since January of 2005 and currently are on their 35th well of a 48 well CBM drilling program. To date, the Corporation continues to enjoy 100 percent success and has been consistently averaging less than a 10 day cycle time (from spud to sales). The Corporation plans to complete its phase one 48 well program in early December and is on schedule with the drilling of two deep shale wells in the fourth quarter of 2005, however the closing of the announced acquisition will provide numerous additional shale locations from a drilling and re-completions standpoint, and consequently capital allocation to these will be a consideration.

The active drilling program in Poteau, Oklahoma, has resulted in the need for increased pipeline capacity. Mahalo is very close to the completion of unblocking the system with 10 inch and 6 inch modifications, thus optimizing the wellhead and gathering system pressures.

In Canada, Mahalo continues to grow its CBM lands. Since the last press release (September 23, 2005) Mahalo has both acquired and entered into land transactions encompassing 150,000 gross acres with a trust and a junior oil and gas company providing a large inventory of Horseshoe Canyon and Mannville locations. Mahalo, as previously announced, commenced its horizontal drilling program utilizing its own drilling technique in the Corbett Creek area, and has since cased a 905 metre Mannville horizontal well that exhibited strong technical merits regarding its gas content and optimum cleating trajectory. As a result, the Corporation immediately spudded its next location and is now installing a pipeline that will allow the field to realize production prior to year end. Mahalo's earlier decision (September 23 press release) to purchase a 60 percent working interest in eight sections of land in the highly prospective Mannville coal development areas in Corbett Creek and Judy Creek has been validated. This expanded land position in the greater Corbett Creek area further solidifies Mahalo's opportunities in the area. A total of five horizontal Mannville drills are anticipated for 2005. Mahalo's Horseshoe Canyon drilling program will begin mid-October. The program will be concentrated in the Wizard Lake and Bittern Lake areas of Central Alberta.

Mahalo is currently selling 5.3 mmcf/d (883 boe/d) prior to the acquisition, and continues to work towards its targeted exit rate of 13. mmcf/d (10.0 mmcf/d prior to the proposed acquisition). To date the Corporation has earned an estimated net 90,652 acres (exclusive of USA acquisition) and has further ability to earn an additional 58,000 over the near term.

The USA acquisition is expected to be accretive to Mahalo's cash flow, production and net asset value on a per share basis. The actual matrix for this transaction equates to the following:



USD$ / CDN$
Purchase price $24,500,000 / 29,420,000
Less land (45,000 acres @ $300/acre) $13,500,000 / 16,200,000
Balance allotted to reserves, seismic,
infrastructure $11,000,000 / 13,220,000
Production @ 625 boe/d (with land in)
$ per flowing boe/d $39,000 / 47,000
Production @ 625 boe/d (with land out)
$ per flowing boe/d $18,000 / 21,000
CF/Price based on $30 per boe netback (land in) 3.6x / 4.3x
CF/Price based on $30 per boe netback (land out) 1.6x / 1.9x


Mahalo is continuing to stay on track with its 2005 capital program. This program will involve the drilling of 42 grosswells by year end. However, as a result of this USA acquisition, along with its on-going ability to secure additional Horseshoe Canyon/Mannville land tracts in Canada, the Corporation is developing parameters for the market place as to its 2006 capital expenditure and production profile and will provide guidance in the near future.

Additional information about Mahalo and this transaction is available on SEDAR (www.sedar.com) or the Corporation's website at www.mahaloenergy.com.

Disclosure provided herein in respect of 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.

Forward Looking Statements

Certain information regarding the Corporation set forth in this document, including management's assessment of the Corporation's future plans and operations contains forward looking statements that involve substantial known and unknown risks and uncertainties. These forward looking statements are subject to numerous risks and uncertainties, some of which are beyond the Corporation's and management's control, including but not limited to, the impact of general economic conditions, industry conditions, fluctuation of commodity prices, fluctuation of foreign exchange rates, imperfection of reserve estimates, environmental risks, industry competition, availability of qualified personnel and management, stock market volatility, timely and cost effective access to sufficient capital from internal and external sources. The Corporation's actual results, performance or achievement could differ materially from those expressed in or implied by, these forward looking statements and accordingly, no assurance can be given that any of the events anticipated to occur or transpire from the forward looking statements will provide what, if any benefits to the Corporation.

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

Contact Information

  • Mahalo Energy Ltd.
    Duncan Chisholm
    Chief Executive Officer
    (403) 262-9623
    or
    Mahalo Energy Ltd.
    Milton Porter
    Chief Financial Officer
    (403) 262-9623
    or
    Mahalo Energy Ltd.
    201b, 218 - 8th Avenue S.W.
    Calgary, Alberta T2P 1B5
    (403) 262-7049 (FAX)
    Website: www.mahaloenergy.com