Pace Oil & Gas Ltd.
TSX : PCE

Pace Oil & Gas Ltd.

August 08, 2011 18:37 ET

Pace Reports Record Production, Increased Oil Weighting, With Reduced Operating Costs Driving Record Cash Flow

CALGARY, ALBERTA--(Marketwire - Aug. 8, 2011) - Pace Oil & Gas Ltd. (TSX:PCE) ("Pace" or the "Company") is pleased to provide an update of its operations and its financial results for the three and six months ended June 30, 2011.

Pace continues to deliver strong growth and solid results from its operating activities. We have increased production, oil weighting and cash flow while maintaining a strong balance sheet. The ongoing focus on resource plays, our diligence in maximizing the potential from the Dixonville waterflood and our attention to detail in reducing our operating costs have all contributed to our continued success. Operating netbacks have increased 61% to $24.11/boe from $15.00/boe in Q2 2010 with our increased oil production and lower operating costs. Pace's top tier oil producing property at Dixonville continues to respond to waterflooding more positively than initially modeled. Despite a confluence of unusual events including flooding rains, forest fires and pipeline closures we were able to deliver solid performance in a challenging second quarter. Flooding affected operations in Southern Alberta and Red Earth, the Plains pipeline leak shut-in production in Northern Alberta for a period of time until we were able to truck our volumes and the devastating fires in Slave Lake impacted our operations in Red Earth. With these challenges and the extended spring break up behind us, we look forward to implementing our program for the remainder of the year.

CORPORATE HIGHLIGHTS:

Strong Oil Production Increases

- Q2 2011 production increased 39% from Q2 2010 averaging 14,262 boe/d.

- Q2 2011 oil and liquids production increased 72% to 6,077 bbls/d from 3,542 bbls/d in Q2 2010.

- Q2 2011 oil and liquids weighting increased to 43% of total production from 34% in Q2 2010.

- Q2 2011 natural gas production increased 22% from Q2 2010 to average 49,111 mcf/d.

Funds from Operations Increases

- Q2 2011 petroleum and natural gas sales increased 77% to $65.3 million from $36.9 million in Q2 2010.

- Q2 2011 funds from operations increased 149% to $25.9 million compared to $10.4 million in Q2 2010.

- Q2 2011 funds from operations per share increased 69% to $0.54/share compared to $0.32/share in Q2 2010.

Operating Netback Increases

- Q2 2011 operating expenses decreased 23% to $13.20/boe from $17.24/ boe in Q2 2010.

- Q2 2011 operating netbacks per boe increased 61% to $24.11/boe from $15.00/boe in Q2 2010.

Balance Sheet and Financial Flexibility Improves

- Bank lines increased 25% to $275 million from $220 million.

- Net debt at June 30, 2011 was $163 million with $112 million available on existing credit facilities.

- Four oil hedges in place:

i. 1,000 bbls/d swap at $93.95 Cdn for calendar year 2011;

ii. 500 bbls/d collar at $95.00 to $107.20 Cdn for April to December, 2011;

iii. 500 bbls/d collar at $95.00 to $108.00 Cdn for April to December, 2011; and

iv. 500 bbls/d collar at $95.00 to $117.75 Cdn for calendar year 2012.


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Financial
(000s, except per
 share amounts)        Q2 2011    Q2 2010    Q1 2011   YTD 2011    YTD 2010
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Funds from
 operations          $  25,920  $  10,412  $  24,599  $  50,519  $   21,275
 Per share- Basic         0.54       0.32       0.52       1.06        0.65
 Per share- Diluted       0.54       0.32       0.52       1.06        0.65
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Net income (loss)    $   9,042  $  16,362  $   1,687  $  10,729  $   (1,065)
 Per share- Basic         0.19       0.50       0.04       0.23       (0.03)
 Per share- Diluted       0.19       0.50       0.04       0.22       (0.03)
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Total capital
 expenditures        $  15,910  $   9,225  $  45,732  $  61,642  $   31,077
Net acquisitions
 (dispositions)              -         20     (2,000)    (2,000)      4,473
Net debt               163,459    162,192    173,245    163,459     162,192
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Operations
Average daily
 production
 Natural gas (mcf/d)    49,111     40,372     49,640     49,374      39,026
 Oil & NGLs (bbls/d)     6,077      3,542      5,868      5,973       3,537
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 Combined (boe/d)       14,262     10,271     14,141     14,202      10,041
 % Oil & NGLs               43%        34%        41%        42%         35%
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($/boe)
Sales price          $   50.32  $   39.52  $   45.22  $   47.79  $    42.43
Royalties               (10.87)     (5.24)     (9.26)    (10.07)      (6.31)
Operating expenses      (13.20)    (17.24)    (13.51)    (13.35)     (18.43)
Transportation
 expenses                (2.14)     (2.04)     (1.68)     (1.91)      (1.94)
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Operating netback    $   24.11  $   15.00  $   20.77  $   22.46  $    15.75
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OPERATING HIGHLIGHTS

Pace's capital activities this quarter focused on completing the Haro pipelines and facilities early in the quarter and starting our oil drilling in southern Alberta which was significantly delayed due to extremely wet ground conditions. Field activities were challenging this quarter with some of the most adverse field conditions ever experienced in Alberta including flooding in southern and northwest Alberta, a major third party pipeline outage at Red Earth and northwest Alberta and forest fires at Slave Lake near Pace's Red Earth area. Although these conditions were impactful in costs and delays, thanks to the efforts of our field staff, marketing department and production engineers, we were able to limit production losses and deliver our product to market.

Pace operates a number of high quality areas with both oil and sweet natural gas opportunities. These world class resource plays exist on our large land base of over 1.2 million gross acres. With our expertise, we are able to capitalize on horizontal drilling, multi-stage fracture stimulation and Enhanced Oil Recovery opportunities to maximize the benefit of each dollar invested. As previously announced, our Engineered Oil Initiative is the focus of our development program with identified oil opportunities that have the potential to add significant low cost reserves and production for Pace from our enviable suite of oil properties.

Dixonville

Production from our Dixonville area averaged approximately 3,500 boe/d in Q2 2011 with approximately 3,000 bbl/d of light oil and 3,000 mcf/d of natural gas. Pace's Dixonville Montney "C" pool is a top tier light oil producing property in Alberta and is owned 100% by Pace. This 30 degree API oil pool continues to see strong response from the waterflood exceeding our expectations and simulation model predictions. We are expediting phase 4 of the waterflood and are adding a 5th phase with the aim of optimizing oil production rates from this pool. We are also evaluating various tertiary recovery techniques which would further add to the recovery potential of this massive oil resource.

Northwest Alberta - Rainbow, Haro

Pace has a large operating and production base in the Rainbow area where the Company produces over 3,500 boe/d (18,000 mcf/d of natural gas and 500 bbls/d of oil). In addition to our existing low decline gas and light oil production from this area the Company has a large oil resource play in the early stages of development. The Pekisko oil resource play in this area has largely been underexplored due to its remoteness and winter only access. However with the advantage of higher oil prices, new technologies and the synergy from our existing operations Pace has the platform to systematically pursue and evaluate this huge oil accumulation. To date, we have assembled over 100 net sections of Pekisko rights along this trend, constructed pipeline and water handling facilities and drilled a number of horizontal wells. Pace's exploration activities to date in the Haro area are in the early stages of an oil resource development and we are encouraged by the continuous nature and extent of the Pekisko oil production in the wells we have drilled along the trend. Based on these results, we have an independent third party resource assessment of over 1.16 billion barrels net working interest of Discovered Petroleum Initially-In-Place (DPIIP). This is an estimate only and the actual DPIIP may be greater than or less than the estimates provided. DPIIP, also known as a "discovered resource", is defined as that quantity of petroleum that is estimated, as of a given date, to be contained in known accumulations prior to production. The recoverable portion of DPIIP includes production, reserves and contingent resources; the remainder is unrecoverable. A recovery project cannot be defined for this volume of discovered petroleum initially-in-place at this time, and as such at the effective date of the independent evaluation, it cannot be further sub-categorized. There is no certainty that it will be commercially viable to recover or produce any portion of the resources. Although certain wells drilled this past winter encountered higher than anticipated water cuts, we continue to evaluate various completion techniques to optimize the oil production rates. We remain optimistic that our continued efforts will identify key processes to economically develop this large scale oil resource opportunity.

During the quarter, we experienced production constraints resulting from delays in regulatory approvals and the major leak on a third party Rainbow pipeline resulted in production disruption and contributed to increased transportation costs. In July, our natural gas production from this area was shut-in for eleven days as a third party performed pipeline maintenance.

Red Earth

Pace has over 60 net sections in the Red Earth area and is currently producing over 600 bbls/d of top quality light oil from the conventional Granite Wash and Keg River formations. Fires in the Slave Lake area caused power disruptions which resulted in a portion of our production from this area being shut-in for one to three weeks. Pace also has a large land holding in the Slave Point oil resource play (28,000 gross, 18,500 net acres) in Red Earth and over this past winter we drilled one horizontal (100%) and participated for 50% in a successful vertical Slave Point oil well. Due to the unseasonably wet weather in the area this spring and continued wet summer, our horizontal well will not be completed until the fall. Pace has a substantial operating presence in the Red Earth area including operated water handling facilities, oil batteries and an extensive pipeline network which significantly lowers the cost to pursue the Slave Point oil resource play. We anticipate commencing operations on our inventory of 15-20 gross wells targeting the Granite Wash, the Keg River and the Slave Point this winter.

Southern Alberta

The Company's production from Southern Alberta is over 4,000 boe/d (35% oil) from over 435 net sections of land. We are targeting numerous oil resource locations in lithic channels within the Mannville and the Pekisko using our extensive 3D seismic data base along with our proprietary evaluation techniques. We have approximately 13 gross (12 net) locations that we will be pursuing in Q3 and Q4 2011. Eleven of these locations are horizontal wells with planned multi-staged fracture stimulations. As part of our Engineered Oil Initiative, we are progressing on a number of waterflood applications and numerous enhanced oil recovery projects including using Alkaline Surfactant Polymer (ASP) flooding to increase oil recovery. A number of oil and gas producers throughout Southern Alberta have successfully applied these technologies that added reserves and production from mature producing properties. Pace has identified a number of applicable technologies and opportunities and continues to expand in this area.

Deep Basin

In the Deep Basin, Pace has over 65 net sections of land where we target the sweet natural gas resource in the Cadomin and the Nikanassin along with natural gas in the more conventional Cretaceous reservoirs. We have been successful in efficiently exploiting these natural gas opportunities by commingling production from all of the horizons. This enables us to explore for the deeper resource plays on the back of the conventional development. In Chinook Ridge, extremely wet ground conditions have delayed our project to loop an existing pipeline to maximize flow from our vertical Cadomin Nikanassin sweet natural gas well that flowed at over 9,000 mcf/d. In Elmworth we have plans to drill up to 3 gross (2.1 net) horizontal natural gas wells targeting the Cadomin and the conventional Falhers and Cadotte zones. Although we have numerous locations that could be drilled in the Deep Basin, we are being highly selective due to the weak natural gas pricing environment in Alberta and North America.

OUTLOOK

In Q2 2011, Pace was highly successful on a number of fronts including completing our planned winter program, bringing numerous locations targeting conventional and resource opportunities to the drill ready stage and maintaining our production levels during extremely harsh operating conditions. This demonstrates Pace's strengths from its people, to its opportunity base and to its operating infrastructure. We are not only rich in resource potential, but have a low risk reserve base from which to grow organically. We have reduced operating costs for the last six quarters and increased oil weighting resulting in a greater than 60% increase in netbacks. Our ability to economically unlock significant potential from our numerous play types using developing and new technologies has provided a platform for continued growth.

We will continue to focus on our oil opportunities in the second half of 2011 and further restrict our gas investments. We expect to maintain our capital program for the year to total approximately $100 - $110 million. With the restricted gas program, the extreme weather conditions that caused project delays and the unforeseen pipeline issues that interrupted production, we are easing our production guidance for the year to average between 14,000 and 15,000 boe/d. By year end oil and liquids are expected to make up approximately 50% of Pace's production and we expect this percentage to continue to grow further in 2012.

On June 30, 2011 we instituted a one year Normal Course Issuer Bid allowing the company to purchase up to 5% of its stock on the open market with a daily limit of 33,123 common shares subject to TSX rules. In July the Company purchased 31,400 shares under the bid, and these shares will be cancelled.

We also report that Dale Miller, Pace's Chief Operating Officer, has resigned in order to pursue another opportunity at a more senior level at another organization.

CONFERENCE CALL

Pace will host a conference call to discuss Q2 2011 financial results. The conference call will take place on Tuesday, August 9, 2011 at 9:00 a.m. Mountain Time (11:00 a.m. Eastern Time).

To access and /or participate in the conference call dial 1-877-407-0782. Participants are advised to dial into the call five minutes prior to the starting time to register. To access and listen to the simultaneous webcast by internet, enter in your web browser:

http://www.investorcalendar.com/IC/CEPage.asp?ID=165521.

A replay of the conference call will be available from August 9, 2011 for a limited time by dialing 1-877-660-6853. The replay passcode is Account # 286 Conference ID # 377084. In addition, the webcast will be archived on Pace's website at www.paceoil.ca for a limited time.

Pace has all of the elements of a top-tier intermediate producer. Pace has a solid oil production base in Dixonville, a significant oil resource play inventory in Southern Alberta combined with its light oil property in Red Earth, plus a prolific natural gas resource base in the sweet spot of the Deep Basin. The Company is excited about the opportunities it has identified and looks forward to delivering solid results in the months and years ahead. Pace trades on the TSX under the symbol PCE.

ADVISORY

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.

FORWARD-LOOKING STATEMENTS

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 "targeting", "continue", "until", "forecast", "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 on-stream; and

- the performance characteristics of oil and natural gas properties.

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 press release or as of the date specified in the documents incorporated by reference into this press release, 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 rates;

- 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; and

other factors which are included under "Risk Factors" in Pace's Annual Information Form on file with the Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com). 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.

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