Orleans Energy Ltd.

Orleans Energy Ltd.

September 02, 2010 08:17 ET

Orleans Energy Announces Follow-Up Drilling Success and Additional Crown Land Acquisition at Waskahigan and Provides a Revised Capital Program Update

CALGARY, ALBERTA--(Marketwire - Sept. 2, 2010) - Orleans Energy Ltd. ("Orleans" or the "Company") (TSX:OEX) is pleased to provide an operational update highlighting follow-up Montney light oil drilling success and strategic land capture at Waskahigan in addition to an updated, light oil-focused capital drilling program.

Waskahigan Light Oil Drilling Success and Key Land Capture

At Waskahigan, in West Central Alberta, Orleans successfully drilled and completed its third horizontal well (1.0 net) located at 5-25-63-23W5M. The 5-25 well was drilled to a total measured depth of 3,510 meters with a horizontal section of 1,183 meters in the Montney formation. Completion operations encompassed a thirteen stage, 230 tonne fracture stimulation (average 18 tonnes per stage). Following a 27 hour clean-up, the 5-25 well was flow tested on a continuous 86 hour (3.6 days) flow-back test with a final rate of approximately 1,100 barrels per day ("bbls/d") of light gravity sweet oil (42 degree API) and 1.45 million cubic feet per day ("mmcf/d") of associated sweet natural gas for an overall oil equivalent test rate of approximately 1,340 barrels of oil equivalent per day ("boe/d"). After clean-up and 17 hours into the flow-test, the 5-25 well recovered all of its completion load fluid and the final wellhead flowing pressure was 563 psi. The success of the 5-25 well is a significant event as it validates the Company's oil pool geological mapping and increases Orleans' oil weighting of its corporate reserves and production profile. The 5-25 well is anticipated to be on-stream by the end of September 2010 at an initial rate subject to the ERCB's New Oil Well Production Period limit, which results in an estimated rate of approximately 550 boe/d, comprised of 451 bbls/d of light crude oil and 0.6 mmcf/d of associated natural gas. The 5-25 well will qualify for the Alberta Government's Horizontal Oil New Well royalty rate of 5% for the first 36 months of production, up to a maximum of 80,000 barrels of oil equivalent produced.

The 5-25 well is a follow-up drill to the Company's 4-36 Montney oil discovery at Waskahigan. On June 19, 2010, the 4-36 horizontal well (1.0 net) was brought on-stream and is presently producing approximately 150 bbls/d of light gravity sweet crude oil (42 degree API) and 0.65 mmcf/d cubic feet per day of associated sweet natural gas for an oil equivalent rate of approximately 255 boe/d. Effective August 1, 2010, the 4-36 well was granted Good Production Practice ("GPP") by the Energy Resources Conservation Board. The 4-36 well, drilled to a total measured depth of 3,532 metres with a horizontal section of 1,256 meters, was completed with a twelve-stage, 111 tonne fracture stimulation (average 9 tonnes per stage). Similar to the Waskahigan 5-25 well, the 4-36 well qualifies for the Horizontal Oil New Well royalty rate of 5% for the first 36 months of production, up to a maximum of 80,000 barrels of oil equivalent produced.

With respect to Orleans' land holdings position at Waskahigan, at the September 1, 2010 Alberta Crown land sale, the Company was successful in acquiring two key sections (2.0 net), immediately offsetting the 5-25 well. As a result, Orleans presently has amassed a 33 section (21,120 acres), contiguous land block at Waskahigan (almost an entire township), all at 100% working interest. The Company believes that it has now amassed all of the significant, prospective acreage in this emerging exploration area. As such, Orleans intends to undertake a focused drilling delineation strategy on a go-forward basis. Refer to Revised Focused Capital Program outlined hereafter.

Revised Focused Capital Program

With the initial, favorable drilling results at Waskahigan on its oil-prone acreage, the Company has the operational flexibility to focus on light oil projects over the next 12 to 15 months within the context of a low natural gas price environment. With oil prices presently approximately four times higher than gas prices on an energy equivalent basis, the economic catalyst exists to increase the Company's emphasis on pursuing light oil-weighted capital investment opportunities.

Consequently, as a result of the current commodity price environment and early-stage drilling success for light oil at Waskahigan, Orleans intends to focus its go-forward capital investments and re-allocate capital funds towards its emerging Waskahigan resource play. The Company's focus will be on the systematic delineation of its Waskahigan Montney acreage, specifically the light oil prospective lands on the eastern portion of Orleans' 33 section land block (33.0 net). Orleans' geological models have mapped approximately 50% of its lands being situated within the oil reservoir. This strategic "delineation and de-risking" objective, in contrast to a conventional approach skewed solely towards production growth and cash flow expansion, is expected to enhance the Company's understanding and value of the resource potential of its Waskahigan land base this year and throughout 2011, thus positioning this asset base for commercial infill development drilling on a much larger scale.

With this objective, Orleans' 2010 capital expenditures are anticipated to increase to approximately $51 million (the "Updated 2010 Capital Program"), as compared to the original 2010 capital program of $41 million. The Company intends to internally fund the Updated 2010 Capital Program with generated cash flow from operations and draw downs on its bank credit facility, which is currently drawn $43.4 million against a borrowing base capacity limit of $60 million. The Updated 2010 Capital Program now includes the drilling of nine wells (8.1 net), a reduction from the original budget of eleven (9.6 net) wells. The updated drilling program includes five (4.1 net) horizontal wells at Kaybob (already drilled) and four (4.0 net) horizontal locations at Waskahigan (two drilled to-date with the remaining two to be drilled in the fourth quarter of 2010 with production additions anticipated in the first quarter of 2011, pending success). The drilling and completion expenditure component of the Updated 2010 Capital Program is projected at $27 million, with the remaining funds allocated towards investments in field facilities, seismic programs and land capture at Waskahigan (of which approximately $11 million has already been incurred to-date to acquire 14 sections).

Based on the Updated 2010 Capital Program, reflecting a lower number of wells drilled and brought on-stream this year than originally planned, Orleans' average daily production for 2010 is now projected between 3,800 and 3,900 boe/d, weighted 82% natural gas and 18% natural gas liquids and light oil, with a forecasted commodity weighting in early 2011 of 75% natural gas and 25% light oil and natural gas liquids. With regards to projected cash flow from operations for 2010, utilizing commodity price assumptions of an AECO gas price of C$3.75 per gigajoule, a West Texas Intermediate ("WTI") oil price of US$76.80 per bbl, and an exchange rate of 1C$ = 0.96US$, cash flow from operations for 2010 is estimated at $26 million or $0.40 per share (basic outstanding). Based on the Updated 2010 Capital Program and cash flow projection, Orleans' year-end 2010 net debt balance is projected to approximate $48 million, as compared to its $60 million bank credit facility borrowing limit.

As a result of the Company's available capital being directed towards Waskahigan light oil opportunities, Orleans-operated tight gas drilling projects in the Kaybob Montney, Pine Creek Wilrich and the Duvernay shale have been de-prioritized over the near-term. However, industry participants are actively drilling these play types in close proximity to the Company's lands and thus potentially "de-risking" and advancing these projects without the need for Orleans to undertake its own capital investment in the near term. The Company's Kaybob, Waskahigan and Ante Creek land base is located within the heart of the newly developing Duvernay shale gas play. The Company holds 57 sections of Crown lands within the fairway, all at 100% working interest, which includes rights in both the Montney and Duvernay shale horizons. Refer to Orleans' August 12, 2010 news release for details on industry land sale activity involving the Duvernay shale.

In summary, although this Waskahigan delineation phase is early-stage, the Company's focus on such could prove to be the most significant intrinsic "value capture" initiative for Orleans since its Kaybob Montney gas discoveries and follow-up development. The Company appreciates the patience exhibited by its shareholders since the initial Waskahigan land foray back in September 2008 and throughout the systematic accumulation of Orleans' large acreage position within the prospective Montney fairway and looks forward to providing timely updates as it executes this "delineation and de-risking" strategy.

Orleans Energy Ltd. is a Calgary, Alberta-based crude oil and natural gas company, with common shares trading on the Toronto Stock Exchange under the symbol "OEX". Orleans is a team of dedicated, experienced professionals focused on the creation of shareholder value via acquisition, exploration and development of crude oil and natural gas assets in Alberta, Canada.

The information in this news release contains certain forward-looking statements. These statements relate to future events or our future performance. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as "seek", "anticipate", "plan", "continue", "estimate", "approximate", "expect", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe", "would" and similar expressions. These statements involve substantial known and unknown risks and uncertainties, certain of which are beyond the Company's control, including: the impact of general economic conditions; industry conditions; changes in laws and regulations including the adoption of new environmental laws and regulations and changes in how they are interpreted and enforced; fluctuations in commodity prices and foreign exchange and interest rates; stock market volatility and market valuations; volatility in market prices for oil and natural gas; liabilities inherent in oil and natural gas operations; uncertainties associated with estimating oil and natural gas reserves; competition for, among other things, capital, acquisitions, of reserves, undeveloped lands and skilled personnel; incorrect assessments of the value of acquisitions; changes in income tax laws or changes in tax laws and incentive programs relating to the oil and gas industry ; geological, technical, drilling and processing problems and other difficulties in producing petroleum reserves; and obtaining required approvals of regulatory authorities. The Company's actual results, performance or achievement could differ materially from those expressed in, or implied by, such forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur or, if any of them do, what benefits that the Company will derive from them. These statements are subject to certain risks and uncertainties and may be based on assumptions that could cause actual results to differ materially from those anticipated or implied in the forward-looking statements. The Company's forward-looking statements are expressly qualified in their entirety by this cautionary statement. Except as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements.

In this news release, reserves and production data are commonly stated in barrels of oil equivalent ("boe") using a six to one conversion ratio when converting thousands of cubic feet of natural gas ("mcf") to barrels of oil ("bbl") and a one to one conversion ratio for natural gas liquids ("NGLs" or "ngls"). Such conversion may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf: 1 bbl is based on energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Any references in this news release to initial and/or final raw test or production rates and/or "flush" production rates are useful in confirming the presence of hydrocarbons, however, such rates are not determinative of the rates at which such wells will commence production and decline thereafter. Additionally, such rates may also include recovered "load oil" fluids used in well completion stimulation. While encouraging, readers are cautioned not to place reliance on such rates in calculating the aggregate production for the Company.

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