NAL Oil & Gas Trust
TSX : NAE.UN

NAL Oil & Gas Trust

September 13, 2010 06:00 ET

NAL Oil & Gas Trust Cardium and Mississippian Light Oil Operations Update

CALGARY, ALBERTA--(Marketwire - Sept. 13, 2010) - NAL Oil & Gas Trust (the "Trust" or "NAL") (TSX:NAE.UN) provides an operations update on its Cardium and Mississippian light oil projects in central Alberta and southeast Saskatchewan.

On NAL's operations at Cochrane and Hoffer, Mr. Marlon McDougall, NAL's Chief Operating Officer, stated "we are encouraged by the initial results of the light oil plays at both Cochrane in Alberta and Hoffer in Saskatchewan, with performance to date which has exceeded our expectations in these two emerging areas. With limited reserves currently booked, we remain optimistic about the future production and reserves potential for the Trust, despite the early stage of development. These two areas are expected to grow significantly in the future, complementing the Trust's established light oil play in the greater Garrington area where performance in the Cardium is now proven to be repeatable with 31 wells drilled, yielding attractive economics and establishing considerable running room over the next several years."

HIGHLIGHTS:

  • Garrington Cardium drilling provides proven repeatability with 31 wells drilled to date, supporting significant future drilling and reserve bookings;
  • The 3-17-27-3W5M well at Cochrane, which is one of NAL's strongest Cardium producers to date, flowed at approximately 2,300 boe per day post-load-fluid recovery and produced on test for five days prior to being shut-in for equipping at an average rate of 1,300 boe per day. NAL operates this area and has a 65% working interest;
  • Production in the Hoffer area of southeast Saskatchewan is expected to grow from approximately 200 bbls per day at the beginning of the year to approximately 1,500 bbls per day at year end. NAL operates this area and has a 50% working interest; and
  • NAL's 2010 exit production rate is expected to be above 31,000 boe per day and full year average volumes are expected to be in the mid-range of guidance of 29,500 – 30,500 boe per day.

Please note: several maps and production performance plots have been updated within NAL's corporate presentation in conjunction with this press release. We invite you to view that presentation by clicking on the direct link below:

Link to NAL corporate presentation: http://www.nal.ca/files/Corporate_Presentation_September.pdf
CARDIUM OPERATIONS – AN OVERVIEW

The Trust currently has one rig operating in the Garrington area and one in the Cochrane area and is expecting to drill approximately 22 (12 net) Cardium wells in 2010. NAL's drilling and completions teams continue to work aggressively on optimizing field operations to drive per well costs lower while maintaining high levels of environmental and safety standards. The 2011 programs for these areas are currently being formulated, taking into account land owner and facilities utilization considerations.

In 2008, horizontal wells were drilled and completed in the Garrington area for $4 million per well. These costs were reduced to $3 million in 2009 using better drilling and completion techniques and improved operational efficiency through reliability and continuous operations. In 2010, NAL is drilling longer horizontal sections (1,200-1,400 meters vs 1,000 meters) and placing more fracs (10-14 vs 8) for the same $3 million. 

Pad drilling is proving to be highly effective in reducing facility and pipeline costs, addressing surface access concerns from landowners and working around limitations based on surface geography. Although drilling costs are slightly higher for this operation, it allows drilling operations to continue through break-up, taking advantage of reduced industry activity and better access to equipment during the second quarter. 

Existing facilities and infrastructure continue to be optimized in the Garrington area through efficient well planning. High initial rates from wells require that drilling is spread out across the infrastructure in order to avoid over capitalization of facilities and pipelines based on peak production. In Cochrane, NAL will be driving a joint industry gas gathering pipeline that is currently being surveyed and acquired with expectations for construction in the fourth quarter of 2010. This gas infrastructure will form the back bone for required future gas conservation in the area.

After several months of production history, performance from the Trust's first water frac'd Cardium oil well in Garrington is marginally below offset wells completed with oil but is not outside NAL's established range of expectations based on reservoir heterogeneity. Now that the long term viability of the play is well supported, NAL anticipates executing a broader program of water based fracs in 2011. It is expected that there will be a $300,000 - $400,000 per well savings in frac oil costs, partly offset by higher fluid handling costs and more fluid recovery time.

GARRINGTON CARDIUM OIL PROGRAM CONTINUES TO DELIVER

NAL's Cardium program continues to deliver in its core area of Garrington with results that are repeatable and support the original forecasted production curve for the area. It is expected that the Trust will drill 17 wells in the Cardium in the greater Garrington area in 2010. Cardium production in this area has grown from approximately 750 boe per day in late 2008 to a forecasted rate of approximately 3,000 boe per day by the end of 2010. The Trust's working interest is approximately 65% in the area. With the significant number of wells now drilled and on stream, management is satisfied that it has now validated the light oil resource and a five year drilling program in the greater Garrington area.

INITIAL CARDIUM OIL PERFORMANCE AT COCHRANE IS ENCOURAGING

NAL's Cochrane development program commenced drilling in the second quarter of 2010, with completion and tie-in activities progressing through the second half of the year. In addition, industry activity in the Cochrane area has been positive and has given the Trust confidence in the longer term viability of the play. The Trust expects to drill five (2.3 net) Cardium wells in the area in 2010. NAL's significant acreage position of approximately 65 gross sections was successfully acquired through crown land sales, acquisitions and strategic partnerships before competition in the region increased land costs and eroded full cycle play economics and value.

The first well in the program at 13-3-27-3W5M in which the Trust has a 65 percent working interest, flowed at approximately 600 boe per day post-load-fluid-recovery and had a first month average production rate of approximately 170 boe per day. This well performance is comparable to the Trust's typical initial production rates in the Garrington area to the north and supports a potential rate of return in the excess of 35% at a WTI price of $US 75 per bbl. 

The second well in the Cochrane program at 3-17-27-3W5M in which the Trust also has a 65 percent working interest, flowed at approximately 2,300 boe per day post-load-fluid-recovery and produced on test for five days prior to being shut-in for equipping at an average rate of 1,300 boe per day (1,100 bbls/d of oil and 1.3 mmcf/d of natural gas). This is one of NAL's strongest Cardium wells to date. The Trust expects this well to exhibit significant hyperbolic decline over the first six months as seen in all of NAL's Cardium oil wells, but will provide long term production and reserves supporting positive economics.

An additional three (one net) wells are expected to be completed and on stream by the end of the year. This NAL activity coupled with increased industry activity and continued positive results are expected to validate significant resource potential. The Trust currently has no reserves booked in this area.

DRILLING EXTENDS NEW POOL DISCOVERY AT HOFFER IN SE SASKATCHEWAN

In southeast Saskatchewan, NAL currently has 4 rigs operating targeting Mississippian light oil. There are currently 16 wells drilled in the Hoffer area with 12 producing and expectations that production in the play will grow from approximately 200 bbls of oil per day in January 2010 to over 1,500 bbls of oil per day by year end.

At Hoffer, results to date validate a significant light oil resource and continue to exceed a 40 percent rate of return. Similar to the results in the Trust's Cardium program, individual outcomes at Hoffer have varied, with initial first month production averages of 75 – 300 bbls per day. The Trust has now proven up the Ratcliffe play across nine sections of land in the Hoffer area with significant potential proved and probable reserves to be booked.

Drilling has also commenced on recently acquired large contiguous land blocks adjacent to the Hoffer area with results from these programs expected in the fourth quarter. Positive results from these programs are expected to validate a significant inventory of future light oil drilling locations for the Trust across 250 sections of land. Potential for continuity of the play across the acquired acreage is supported by mapping that reflects the stratigraphic nature of the play, the presence of bypassed pay in several well bores and observations made from NAL's proprietary 3D seismic.

Production performance from the first 12 wells continues to support NAL's initial assumptions for the Mississippian Hoffer trend with:

  • First month initial production rates of 75 - 300 bbls of oil per day;
  • Production qualifying for a 100 mbbl royalty holiday and delivering netbacks of approximately C$50 per boe at WTI prices of US$75 per bbl;
  • Recycle ratios of two to three times;
  • Reserves per well of 75 – 200 mboe;
  • Drilling density of four wells per section;
  • Average cost per horizontal well of approximately $1.7 million to drill, complete, equip and tie-in to a single well oil battery;
  • Wells that do not require fracture stimulation; and
  • Operating costs that are anticipated to be approximately $6 per boe (currently $10 per boe) upon completion of a central gathering facility that is planned to be built in 2011

Bakken light oil potential in the area continues to be proven up by competitor drilling activity on adjacent lands. NAL currently plans to drill a vertical "strat" test in the area to evaluate different horizons and is considering a Bakken horizontal program in 2011 based on offset success.

Initial planning and licensing for a central gathering, treating and water disposal facility with an oil throughput capacity of 5,000 bbls per day is under way. Construction is expected to commence prior to year end with completion in the first quarter of 2011 to ensure production is not limited by poor road conditions for trucking emulsion from single well oil batteries over spring break up.

CORPORATE CONVERSION

NAL is presently planning to convert to a dividend paying corporation toward the end of 2010. By itself, the change in structure of the underlying entity from a trust to a corporation, is not expected to alter NAL's business plan or disciplined operational and financial focus.

NAL's Board will continue to assess the Trust's dividend and payout policy based upon commodity prices, NAL's asset base, opportunities and market conditions. Upon conversion, the Trust's total return will be driven by a combination of yield and growth, with yield expected to remain a meaningful component of the overall return. Future information on payout and dividend levels is expected to be communicated in late October 2010.

OUTLOOK

NAL management is encouraged by the initial results at Hoffer and Cochrane and believes these areas will provide significant production and reserves growth for the Trust in the future.

NAL's development program for 2010 continues to be approximately 80 percent weighted toward oil and evenly balanced between Cardium oil projects in Alberta and Mississippian oil projects in Saskatchewan. Reserves from these plays are expected to be added at approximately $20 per boe (proved plus probable) providing attractive net present values and strong recycle ratios based on oil netbacks of between $40 - $50 per bbl.

With a capital program of approximately $92 million focused on the Trust's Cardium and Mississippian light oil plays through the second half of 2010, NAL's exit rate is expected to be over 31,000 boe per day. Continued curtailment on the Enbridge system in southeast Saskatchewan due to various failures on its pipeline distribution system coupled with additional down time at single well batteries in Hoffer due to extreme wet weather is expected to impact third quarter volumes for the Trust. Until the extent and duration of the latest Enbridge outages are known, it will be difficult to ascertain the full potential impact on NAL's third quarter volumes and full year guidance.

The Trust has executed a deliberate strategy of building grass roots resource style plays in 2010 and as a result has pre-invested significantly on prospective lands at both Crown Land sales and through timely acquisitions with limited associated production and significant undeveloped land. In total, NAL expects to spend $55 - $60 million related to land which, although moving finding and development and finding, development and acquisition metrics higher for the current year, will enhance the Trust's position for the future. 

FORWARD LOOKING STATEMENTS

This press release contains statements that constitute "forward-looking information" within the meaning of applicable securities legislation. Forward looking information is typically identified by words such as "anticipate", "estimate", "expect", "forecast", "may", "will", "could", "plan", "intend", "should", "believe", "outlook", "project", "potential", "target" and similar words suggesting future events or future performance. In addition, statements relating to "reserves" are forward-looking statements as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described exist in the quantities estimated and can be profitably produced in the future. This press release contains forward-looking information pertaining to, among other things, potential reserve additions, drilling plans, anticipated 2010 and 2011 production and production volume growth, anticipated 2010 and 2011 capital expenditures, operating, drilling and completion costs, anticipated drilling density, the construction of additional facilities, netbacks and rates of return, finding and development and finding, development and acquisition metrics, the continuity of the Hoffer play, the potential for future Mississippian (including Bakken) development and production and the future structure of the Trust and its subsidiaries.

Various assumptions were used in drawing the conclusions contained in the forward-looking information contained in this press release including, without limitation, with respect to commodity prices, capital expenditures, royalty rates, the success of NAL's drilling program and the production profile of NAL 's oil and gas reserves.

Forward-looking information is based on current expectations, estimates and projections that involve a number of risks, which could cause actual results to vary and in some instances to differ materially from those anticipated by NAL and described in the forward-looking information contained in this press release. Undue reliance should not be placed on forward-looking information. The material risk factors include, but are not limited to, changes in commodity prices, unanticipated operating results or production declines, the impact of weather on NAL's ability to execute its capital program, risks inherent in oil and gas operations, the uncertainty associated with the interpretation of seismic data, the imprecision of reserve estimates, limited, unfavorable or no access to capital or credit markets, the lack of availability of qualified operating or management personnel, the inability to obtain industry partner and other third party consents and approvals, when required, general economic conditions in Canada, the United States and globally, changes in government regulation of the oil and gas industry, including environmental regulation, changes in royalty rates and other risk factors discussed in other public filings of the Trust including the Trust's current Annual Information Form. Readers are cautioned that the foregoing list of risk factors is not exhaustive.

Forward-looking information is based on the estimates and opinions of NAL's management at the time the information is released.

BOE CONVERSION

Throughout this press release, the calculation of barrels of oil equivalent (boe) is calculated at a conversion rate of six thousand cubic feet (mcf) of natural gas for one barrel of oil and is based on an energy equivalence conversion method. Boes may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy equivalence conversion method primarily applicable at the burner tip and does not represent a value equivalence at the wellhead.

ABOUT NAL

NAL Oil & Gas Trust provides investors with a yield-oriented opportunity to participate in the Canadian upstream oil and gas industry. The Trust generates monthly cash distributions for its unitholders by pursuing a strategy of acquiring, developing, producing and selling crude oil, natural gas and natural gas liquids from pools in southeastern Saskatchewan, central Alberta, northeastern British Columbia and Lake Erie, Ontario. Trust units trade on the Toronto Stock Exchange under the symbol "NAE.UN".

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