Pace Oil & Gas Ltd.

Pace Oil & Gas Ltd.

March 01, 2011 00:45 ET

Pace Oil & Gas Ltd. Announces Significant Increase in Oil-Weighted Reserves and Strong Finding and Development Costs

Reserves Increase to Over 67 Million Boe (49% Oil and Liquids)

CALGARY, ALBERTA--(Marketwire - March 1, 2011) -

"We had an excellent year growing our oil production and delivering strong year over year growth," said Fred Woods, President and Chief Executive Officer of Pace Oil & Gas Ltd. "We have built a very solid portfolio based on high quality light oil reserves, an increased oil weighting and a high percentage of proved producing and total proved reserves. This combined with our low future development costs associated with our reserves, supports the high quality, low risk character of our asset base."

Pace Oil & Gas Ltd. ("Pace" or the "Company") announced its 2010 year end reserves highlighted by significant additions to crude oil reserves and a large overall increase in the proved producing category. Pace grew its proved plus probable reserves ("P+P") to more than 67 million barrels of oil equivalent weighted 49% to oil and natural gas liquids (32,554 mboe). The Company added reserves at a strong finding and development ("F&D") cost of $12.00/boe for proved (including changes in Future Development Costs - "FDC") and $17.20/boe for P+P (including changes in FDC).

The opening reserves represent those associated with the "carved out" assets of Provident Energy Trust's upstream business unit ("PUB") as at December 31, 2009 which amalgamated with Midnight Oil Exploration Ltd. ("Midnight") on June 29, 2010 to form Pace Oil & Gas Ltd. After June 29, 2010, the reserves include both Midnight and PUB and are the activities and results of Pace. This presentation is consistent with the financial statement presentation.

Reserve Highlights:

Solid Oil Weighted Reserves - light and medium oil comprises 92% of our oil and liquids

- Total proved producing reserves increased 34% to 32,359 mboe (55% oil and liquids)

-- Proved producing reserves comprise 48% of total reserves

-- Comprises 63% of total net present value of reserves

-- Net present value (before tax discounted at 10%) increased 32% to $499 million

-- Oil and liquids comprises 76% of the value of total proved producing reserves

- Total proved reserves increased 38% to 41,816 mboe(49% oil and liquids)

-- Proved reserves comprise 62% of total reserves

-- Comprises 72% of total net present value of reserves

-- Net present value (before tax discounted at 10%) increased 30% to $566 million

-- Oil and liquids comprises 74% of the value of total proved reserves

-- Reserve life index of 8.8 years for proved reserves using Q4 annualized production

- Total proved plus probable reserves increased 35% to 67,008 mboe (49% oil and liquids)

-- Net present value (before tax discounted at 10%) increased 25% to $790 million

-- Oil and liquids comprises 72% of the value of total proved plus probable reserves

-- Reserve life index of 14.0 years for proved plus probable reserves using Q4 annualized production

- Net asset value of $14.85 per diluted share at December 31, 2010

- Pace shareholders own a top quality asset base. Pace's reserves comprise 1.4 boe per outstanding share (0.68 barrel of oil and 4.3 mcf) on a P+P basis

Strong Finding and Development Costs

Pace had a very good year of low cost, oil-weighted reserve additions, including a high percentage of proved producing reserves that contributed to our low future development cost requirements of only $97 million for proved reserves and $181 million for proved plus probable reserves.

F&D Costs FD&A Costs F&D Costs FD&A Costs
including including excluding excluding
changes in changes in changes in changes in
FDC ($/boe) FDC ($/boe) FDC ($/boe) FDC ($/boe)
Proved $ 12.00 $ 17.81 $ 13.10 $ 14.65
Proved plus Probable $ 17.20 $ 15.39 $ 12.91 $ 10.63

Operational Highlights:

- Fourth quarter production averaged 13,089 boe/d, a 6% increase over the third quarter

- Oil and liquids increased to over 41% of fourth quarter production

- Capital expenditures for the fourth quarter totalled $19.1 million and $59.3 million for the year

- Acquisition capital was $50.5 million in the fourth quarter and $172.0 million for the year which includes the amalgamation/acquisition of Midnight

- Net debt at December 31, 2010 was $153.6 million. Total bank debt of $149.0 million on a $220 million credit facility

- Commencement of our Pekisko horizontal oil drilling program at Haro

- Completed phase 3 of the Dixonville waterflood and received approval for phase 4 to be conducted later in 2011

"Pace is a resource rich company with a broad and deep portfolio of both oil and natural gas opportunities. We have the opportunity to allocate investment in many attractive plays," said Fred Woods. "We previously announced our decision not to further develop and exploit our Deep Basin gas assets in this environment of low gas prices and as a result we have restricted capital and operations in these areas. For the fourth quarter and into 2011 we have directed capital towards higher netback oil opportunities in Dixonville, Haro and Red Earth and enjoyed positive results."

Independent Reserve Evaluation

The reserve data set forth below is based on an independent reserves evaluation conducted by McDaniel& Associates Consultants Ltd. ("McDaniel") effective December 31, 2010 ("McDaniel Report") and prepared in accordance with the definitions set out under National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities ("NI 51-101"). Pace has a Reserves Committee comprised of a majority of independent board members who review the qualifications and appointment of the independent reserve evaluators. The committee also reviews the process for providing information to the evaluators and meets with the independent evaluators to discuss the procedures used in the independent report, to review the Company's major properties and to identify and discuss any areas of risk. The McDaniel Report was reviewed by the Reserves Committee of Pace.

Reserves Advisory

- Reserves included herein are stated on a working interest basis.

- Natural gas is converted to barrels of oil equivalent ("boe") at a ratio of six thousand cubic feet to one barrel of oil.

- Boe's may be misleading, particularly if used in isolation. In accordance with NI 51-101, a boe conversion ratio for natural gas of 6 mcf:1bbl has been used which is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

- Certain terms and abbreviations used herein, but not defined or described, are defined in NI 51-101 or the COGE Handbook and, unless the context otherwise requires, shall have the same meanings herein as in NI 51-101 or the COGE Handbook.

- Tables may not add due to rounding.

Summary of Oil and Gas Reserves -Working Interest Reserves
Category Crude Oil & NGL's Natural Gas 2010 Total 2009 Total
(Mbbls) (MMcf) (Mboe) (Mboe)
Producing 17,845 55% 87,077 42% 32,359 48% 24,156 49%
Producing 418 1% 20,211 10% 3,786 6% 2,516 5%
Undeveloped 2,181 7% 20,944 10% 5,672 8% 3,716 7%
Total Proved 20,444 63% 128,232 62% 41,816 62% 30,388 61%
Probable 12,109 37% 78,496 38% 25,191 38% 19,297 39%
Total Proved
Probable 32,554 100% 206,728 100% 67,008 100% 49,685 100%

Net Present Value

Pace's crude oil, natural gas and natural gas liquids reserves were evaluated using McDaniel's price forecasts effective January 1, 2011 prior to provision for income taxes, interest, debt service charges and general and administrative expenses. It should not be assumed that the discounted future net production revenues estimated by McDaniel represent the fair market value of the reserves.

Net Present Value of Reserves, before income taxes

December 31, 2010 ($millions) 0% 5% 10% 15%
Proved Reserves
Developed Producing 827 623 499 417
Developed Non-Producing 78 50 35 26
Undeveloped 125 64 32 14
Total Proved 1,030 737 566 457
Probable 876 397 224 142
Proved plus Probable 1,906 1,134 790 599

At year end, Pace's proved non-producing and undeveloped reserves account for only 9.5 million boe of the total proved reserves booked with the majority of the reserves relating to development drilling locations. These locations will be drilled into known horizons with offset production as infill or step out locations or waterflood projects. The future costs associated with proved reserves included in the 2010 McDaniel Report is approximately $97 million and has been subtracted from the future value of the proved reserves. The future costs associated with proved plus probable reserves included in the 2010 McDaniel Report is approximately $181 million and has been subtracted from the future value of the proved plus probable reserves.

Reconciliation of Changes in Working Interest Reserves by Principal Product Type Forecast Prices and Costs

Factors Crude Oil & NGLs Natural Gas Total
Proved Proved Proved
plus plus plus
Proved Probable Proved Probable Proved Probable
(Mbbls) (Mbbls) (MMcf) (MMcf) (Mboe) (Mboe)
December 31,
2009 12,114 22,991 109,645 160,164 30,388 49,685
Extensions &
Recovery 843 1,315 4,500 13,284 1,593 3,528
Revisions 5,167 4,470 (14,717) (21,745) 2,715 845
Acquisitions 3,886 5,345 44,386 70,607 11,283 17,113
Production (1,566) (1,566) (15,582) (15,582) (4,163) (4,163)
December 31,
2010 20,444 32,554 128,232 206,728 41,816 67,008

Finding, Development and Acquisition Costs ("FD&A")

Pace's 2010 exploration and development expenditures totalled $56.4 million and net property acquisitions totalled approximately $172.0 million. The acquisition expenditures includes amounts recorded for the amalgamation/acquisition of Midnight Oil Exploration Ltd. on June 29, 2010 and the Enchant and Dixonville asset packages acquired in December 2010.

2010 FD&A Costs - Working Interest Reserves

Proved plus
Proved Probable
Capital Costs ($000's)
Exploration and Development 56,445 56,445
Change in Exploration and Development FDC (4,759) 18,757
F&D Capital 51,686 75,202
Acquisition Capital 172,017 172,017
FDC relating to acquisitions 54,008 83,407
Acquisition Capital 226,025 255,424
Total Capital 277,710 330,626
Reserve Additions(1)(Mboe)
Exploration and Development 4,308 4,373
Acquisitions 11,283 17,113
Total Reserves 15,591 21,486
Finding Development and Acquisition Costs
F&D including change in FDC $ 12.00 $ 17.20
F&D excluding change in FDC $ 13.10 $ 12.91
Acquisition including change in FDC $ 20.03 $ 14.93
Acquisition excluding change in FDC $ 15.25 $ 10.05
FD&A including change in FDC $ 17.81 $ 15.39
FD&A excluding change in FDC $ 14.65 $ 10.63
Note (1) Reserve additions include technical revisions.

NI 51-101 requires that FD&A costs be calculated including changes in future development costs ("FDC"). Essentially, NI 51-101 requires that the exploration and development costs incurred in the year along with the change in estimated FDC be aggregated and then divided by the applicable reserve additions. Changes in forecast FDC occur annually as a result of development activities, acquisition and disposition activities and capital cost estimates that reflect the independent evaluator's best estimate of the cost to bring the proved undeveloped and probable reserves on production.

The aggregate of the exploration and development costs incurred in the most recent financial year and the change during that year in estimated FDC generally will not reflect total finding and development costs related to reserves additions for that year.

Net Asset Value

Pace's estimated net asset value is $14.85 per diluted share at December 31, 2010. The estimate is based on the present value of proved plus probable reserves discounted at 10% before income taxes and includes estimates for undeveloped lands, seismic and other assets and excludes net debt. The present value of petroleum and natural gas reserves were determined by McDaniel in their year-end evaluation. Undeveloped land at December 31, 2010 was internally valued at an average price of $250 per acre. Seismic was internally evaluated based on a discounted market value of our proprietary data which includes over 12,700 km of 2D data and approximately 2,000 km2 of 3D data.

Net Asset Value - Forecast Pricing and Costs at December 31, 2010
Mboe $/Boe PV ($M) $/Share
Proved Reserves Value at 10%
BIT 41,816 13.53 565,885 $ 11.88
Probable Reserves Value at
10% BIT 25,191 8.90 224,255 4.71
Proved plus Probable Reserves
Value at 10% BIT 67,008 11.79 790,139 $ 16.59

(000's) $/acre
Undeveloped Land 340acres 250 85,000 1.79
Seismic and Other Assets 8,400 0.18
Net Debt (153,647) (3.23)
Total Net Assets $ 729,892 15.33
Basic Shares Outstanding 47,616
Stock options and proceeds 3,412 27,871 (0.48)
51,028 $ 757,763 $ 14.85

The McDaniel price deck for natural gas declined significantly with the average AECO for 2011 decreasing from $6.75/MMBTU forecasted in 2009 to $4.25/MMBTU at December 31, 2010. The average 2011 price forecast for Edmonton light is $84.20 Cdn, also which is down from $87.00 forecasted from the McDaniel 2009 price deck.

Land Holdings

The following table sets out Pace's land holdings as at December 31, 2010.

Developed Undeveloped Total
Gross(1) Net(2) Gross(1) Net(2) Gross(1) Net(2)
Alberta 709,100 480,200 458,900 323,100 1,168,000 803,300
Columbia 1,400 800 21,400 16,900 22,800 17,700
Total 710,500 481,000 480,300 340,000 1,190,800 821,000

(1) "Gross" refers to the total acres in which Pace has an interest.
(2) "Net" refers to the total acres in which Pace has an interest,
multiplied by the percentage working interest therein owned by Pace.

Exploration and development capital investment in 2010 was $56.4 million, including $39.3 million in drilling and completions, $5.5 million in land and seismic, and $11.6 million on facilities focused in the Northwest Alberta area where Pace continues to develop infrastructure associated with the Haro Pekisko oil play. Pace spent an additional $2.9 million on corporate expenditures.

During the fourth quarter of 2010, Pace completed two acquisitions of oil and natural gas properties for a total of $50.5 million net of purchase adjustments. The acquisitions solidify and consolidate the Company's interest in two of its core areas: Dixonville, on the Peace River Arch and Enchant, in Southern Alberta. At Dixonville, the Company acquired 100% interest in a keyhole section of its existing waterflood and consolidated additional surrounding lands and associated infrastructure. This acquisition enables the Company to continue with its optimization plans for increased recovery in the Dixonville Montney "C" light oil pool. In Southern Alberta, the Company consolidated a portion of its existing interests and increased its share of existing oil pools and exposure to its Glauconite lithic channel play.

Pace plans to release its December 31, 2010 audited financial results on March 8, 2011.

Pace is a growth oriented, intermediate producer with a breadth of oil and gas resource opportunities focused in Alberta. Pace's common shares trade on the TSX under the symbol PCE.


Certain statements contained within this press release constitute 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. The use of any of the words "anticipate", "continue", "estimate", "expect", "may", "will", "project", "should", "believe" and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward looking statements. In particular, statements relating to "reserves" or "resources" are deemed to be forward looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the resources and reserves described can be profitably produced in the future. In addition, this press release contains forward-looking statements with respect to: (i) production volumes and expectations regarding the timing of when additional production volumes will be brought on stream; (ii) Pace's drilling plans and the results therefrom including expectations regarding well completions and the start-up of new wells; (iii) future development and exploration activities and the timing thereof; (iv) Pace's plans for the development of its proven and probable undeveloped reserves. With respect to the forward-looking statements contained in this press release, Pace has made assumptions regarding:

-- prevailing commodity prices and exchange rates;
-- availability of labour and drilling equipment;
-- future operating expenses including processing and gathering fees;
-- timing and amount of capital expenditures;
-- government regulation in the areas of taxation, royalty rates and
environmental protection;
-- production of new and existing wells and the timing of new wells coming
-- the performance characteristics of oil and natural gas properties;
-- the size of oil and natural gas reserves;

Although Pace believes that the expectations and assumptions on which the forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because Pace can give no assurance that they will prove to be correct. Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. These statements speak only as of the date of this Annual Information Form or as of the date specified in the documents incorporated by reference into this Annual Information Form, as the case may be. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to:

-- volatility in market prices for oil and natural gas, and in exchange
-- liabilities inherent in oil and natural gas operations and limitations
on insurance;
-- changes or fluctuations in production levels;
-- stock market volatility and market valuation of our stock;
-- 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 and exploration and
development programs;
-- geological, technical, drilling, production and processing problems;
-- changes in legislation, including changes in tax laws, royalty rates and
incentive programs relating to the oil and natural gas industry;

other factors which are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website ( Readers are cautioned that the foregoing lists of factors are not exhaustive. The forward-looking statements contained in this press release are expressly qualified by this cautionary statement. The forward looking statements contained in this document speak only as of the date of this document and Pace does not assume any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable securities laws.

Unaudited Financial Information

Certain financial information included in, or utilized in calculations in, this press release for the year ended December 31, 2010, such as finding, development and acquisition costs, net asset value and net debt are based on estimated unaudited financial results for the year then ended and are subject to the same limitations as discussed under "Forward-Looking Statements". In addition, these estimated amounts may change upon completion of the audited consolidated financial statements for the year ended December 31, 2010 and the changes could be material.

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