Profound Energy Inc.

Profound Energy Inc.

November 13, 2008 16:05 ET

Profound Energy Inc. Announces Its Financial and Operating Results for the Third Quarter of 2008

CALGARY, ALBERTA--(Marketwire - Nov. 13, 2008) - Profound Energy Inc. ("Profound" or the "Company") (TSX:PFX) is pleased to report its operational and financial results for the three and nine month periods ending September 30, 2008.

Profound was formed on November 19, 2007 through the amalgamation of Profound Energy Ltd. ("Former Profound"), a private oil and gas exploration and production company, and Cork Exploration Inc. ("Cork"), a public oil and gas exploration and production company.

Copies of the financial statements and management discussion and analysis in respect thereof for the quarter ended September 30, 2008 will be available at or by visiting Profound's website at


On March 31, 2008, Profound closed a transaction acquiring all of the shares of Defiant Resources Corporation ("Defiant") by way of a Plan of Arrangement. Third quarter results include a full six months of operations of Defiant.

Profound had an active third quarter, drilling 8 gross (5.5 net) wells. Of these wells, 6 (4.6 net) wells resulted in successful gas wells, 1 (0.4 net) resulted in a successful oil well, and 1 (0.5 net) well was abandoned by the operator due to technical drilling difficulties. Six of the seven wells successfully drilled in the quarter have been tied-in to date.

Due to gas processing capacity constraints, and the sale of non-core properties at Brazeau and Majeau in May 2008, average production fell to 2,442 boe/day from 2,831 boe/day in the second quarter. During the third quarter and continuing into the fourth quarter, Profound has invested into natural gas processing and compression facilities allowing production to ramp up in the fourth quarter and into January 2009. Current production is approximately 3,030 boe/day comprised of 13.3 mmcf/day of gas and 808 bbls/day of oil and natural gas liquids.

Funds flow from operations decreased 44 percent from $10.6 million ($0.28 per share) to $5.9 million ($0.16 per share). Included in funds flow is a one-time charge for a provision for bad debt due to one of the Corporation's marketers filing for Canadian Creditor Arrangement (CCAA) for $2.2 million in the current quarter and $0.6 million during the second quarter. Without this charge, funds flow would have been $8.1 million in the third quarter compared to $11.2 million in the second quarter.

Net income of $2.8 million for the third quarter compared to income of $3.3 million in the second quarter of 2008.

Operating netback decreased from $53.97/boe in the second quarter to $40.62/boe in the third quarter due primarily to decreased product prices received.

Total net debt at September 30, 2008, including negative working capital and excluding commodity contracts, was $54.7 million, well within Profound's $70.0 million revolving operating credit facility agreement.

Profound holds 125,192 net undeveloped acres of land on which the Company has identified over 110 drilling locations; 30 of which are multi-stage completion horizontal wells and 80 of which are vertical wells. Profound holds an approximate average working interest of 65 percent in the identified drilling inventory.

Financial and operating highlights for the second and third quarters of 2008
are presented as follows:

Three Month Periods Ended
September 30, June 30,
2008 2008 % Change

($000 unless otherwise
Petroleum and natural gas
sales 14,344 20,711 -31%
Funds flow from operations (1) 5,853 10,636 -45%
Per share - basic and diluted ($) 0.16 0.28 -43%
Net earnings (loss) 2,752 3,297 -17%
Per share - basic and diluted ($) 0.07 0.09 -22%
Net debt (2) 54,726 42,028 30%
Capital expenditures (3) 18,122 (7,912) -
Common shares outstanding (000's) 37,315 37,339 0%
Weighted average shares
outstanding - basic and
diluted (000's) 37,336 37,339 0%


Average daily production
Crude oil & NGL's (bbls/d) 669 809 -17%
Natural gas (mcf/d) 10,641 12,129 -12%
Total (boe/d) 2,442 2,831 -14%

Average selling prices (4)
Crude oil & NGL's ($/bbl) 99.37 114.69 -13%
Natural gas ($/mcf) 8.41 11.11 -24%
Total ($/boe) 63.85 80.41 -21%

Operating netback ($/boe)
Oil and natural gas sales 63.85 80.41 -21%
Royalties 12.06 15.52 -22%
Operating costs 10.73 9.81 9%
Transportation costs 0.44 1.11 -60%
Operating netback 40.62 53.97 -25%

Wells drilled - gross (net)
Oil 1 (0.4) 1 (0.7) -
Natural Gas 6 (4.6) 1 (0.4) -
Abandoned/Other 1 (0.5) 1 (1.0) -
Total 8 (5.5) 3 (2.1) -
Drilling success rate (%) 91 52 -

(1) Funds flow from operations is calculated as cash flow from operating
activities before the change in non-cash working capital
(2) Net debt includes working capital and excludes unrealized financial
(3) Capital expenditures are presented net of proceeds of disposals (June
30, 2008 proceeds from disposals - $13,401).
(4) The average selling prices reported are before hedging activities.


The third quarter of 2008 was characterized by falling product prices and continued capacity restrictions at the Company's main producing property, Carrot Creek. In addition, Profound was negatively impacted by a $2.2 million provision for bad debt ($0.6 million in the second quarter). Gross revenue decreased from $20.7 million in the second quarter to $14.3 million in the third quarter. Funds flow decreased from $10.6 million in the second quarter to $5.9 million for the third quarter. Without the provision for bad debt charge, funds flow would have been $8.1 million in the third quarter compared to $11.2 million in the second quarter.

Royalties decreased due to decreased product sales and prices. The royalty rate remains low at 18.9 percent as the ongoing monthly gas cost allowance credit is significantly higher than in previous years. Without the gas cost allowance credit, the third quarter royalty rate would be 26.7 percent.

Profound continues to review all of its properties to identify where production operations may be optimized to reduce costs. In addition, Profound has replaced some rental equipment with purchased equipment and invested into the expansion of a currently existing gas plant at Carrot Creek where a significant portion of Profound's production is located.

Profound marketed a portion of its gas and oil to SemCams ULC and SemCanada Crude Company both of which filed for protection under The Companies' Creditors Arrangement Act in July 2008. Potential exposure is estimated to be $2.8 million for the period June 1 through July 21, 2008. At this time the Company is unable to confirm the amount of revenues that will be recoverable, but have recorded a provision of $2.8 million ($0.6 million in the second quarter and $2.2 million in the third quarter financial statements).

General and administrative expenses decreased from $3.41 per boe in the second quarter to $2.53 per boe in the third quarter of 2008. Second quarter G&A was high due to additional costs associated with the purchase of Defiant Resources including rent, moving expenses, legal and consulting fees.

Profound had an active third quarter, drilling 8 wells, 7 of which were successful. A total of $18.1 million was spent on capital expenditures. In addition to drilling and completing wells, Profound spent $0.5 million on land and seismic and $2.9 million on facilities and well tie-ins. The majority of the facility costs were at Carrot Creek to mitigate capacity restrictions.



During the three months ended September 30, 2008, Profound produced an average of 10.6 mmcf/day of gas and 669 bbls/day of oil and natural gas liquids for an average daily production of 2,442 boe/day. During the period, production continued to be adversely affected when a third party gas plant operator, who was receiving gas from certain of our wells at Carrot Creek on a best efforts basis, shut-in several of them due to insufficient capacity at the gas plant.

Currently Profound is producing 13.3 mmcf/day and 808 bbls/day of oil and natural gas liquids or a total of 3,030 boe/day.

Carrot Creek, Alberta

Profound drilled 5 (3.0 net) wells at Carrot Creek during the quarter which resulted in 3 (2.1 net) gas wells, 1 (0.4 net) Ostracod oil well and 1 (0.5 net) abandoned well. The gas wells included 1 (0.6 net) horizontal Rock Creek well, 1 (1.0 net) Rock Creek, Ostracod and Ellerslie vertical gas well, and 1 (0.5 net) Rock Creek vertical gas well.

Five wells have been successfully drilled to the Ostracod formation in 2008 in which Profound holds working interests of between 20 and 100 percent. Currently these wells are producing with maximum rate limitations below their capacities. An application has been submitted to the regulatory authorities to qualify the wells for Good Production Practice. Profound expects this application to be approved in 2009.

A number of production restriction issues at Carrot Creek were addressed with additional compression and pipeline projects completed during the quarter. These projects are showing their value allowing several wells to produce with less restricted access into third party gas plants. However, so as to reduce dependence on processing facilities owned and controlled by others, Profound decided to participate in the expansion of a nearby gas plant that will provide it with unrestricted ownership of 10 mmcf/day of gas processing capacity in addition to what is being accommodated by other gas plants on a best efforts basis. The gas plant expansion project is expected to be completed in the first quarter of 2009.

The investment in pipelines, compression facilities and Profound's participation in the gas plant expansion are estimated to cost approximately $7.3 million net to the Company of which $3.8 million had been spent at the end of the third quarter with $3.5 million remaining. When these projects are all complete, estimated to be late this year or early in 2009, Profound will have sufficient capacity to realize the value being created at Carrot Creek without production interruptions being imposed by others.

Profound estimates that it currently has a drilling inventory in excess of 10 horizontal wells and 15 vertical wells at Carrot Creek. Despite this considerable drilling inventory, in light of a pessimistic outlook for the price of natural gas and oil and the uncertainty of general economic conditions, the Company is reviewing its approach at Carrot Creek. Profound intends to optimize its investments in the near term with lower risk drilling able to take advantage of the infrastructure improvements made to date. The Company is approaching its higher risk projects, likely those dependent on supportive gas prices early in their production history, with a defensive posture.

Pembina Area, Alberta

At Pembina, Profound holds an average of sixty percent working interest in 10 contiguous sections of land that are prospective for production of gas from the Notikewan formation. Productive capacity was confirmed earlier in the year with recompletion and fracture stimulation operations on three existing wells.

Subsequent to the end of the second quarter, Profound commenced the drilling of a horizontal well (0.6 net) attempting to exploit this seismically defined natural gas accumulation using multi-stage fracture stimulations. Unfortunately the well, due to unexpected borehole conditions and resulting technical issues with drilling, had to be abandoned. Encouraging results being reported by other operators exploiting the Notikewan formation at nearby locations compels the Company to pursue this opportunity. As such, plans are being made to drill another well in early 2009.

Gas from this area will be transported to a nearby plant owned and operated by a midstream gas processing company. This plant has excess capacity and processing fees have been negotiated.

Peace River Arch

With the acquisition of Defiant Resources Corporation, a second core area was added in the Peace River Arch area of Alberta. Three wells (2.5) net were drilled in the third quarter resulting in 1 (0.8 net) Dunvegan horizontal gas well, 1 (0.7 net) vertical Dunvegan gas well, and 1 (1.0 net) vertical Bluesky gas well.

Two of the wells drilled during the quarter in this area were impactful. One well (1.0 net) was drilled at Dimsdale and the other (0.8 net) at Clairmont. The success of these wells provided the impetus for the Company to purchase and refurbish an existing plant and pipeline delivery point. When re-commissioned and brought on stream during the month of December 2008, the plant will be owned (0.8 net) and operated by Profound and have processing capacity of approximately 9 mmcf/day.

The increase in production from the Peace River Arch operating area when the Clairmont facility is on stream is anticipated to be approximately 300 boe/day net to Profound.

No further drilling is planned for the area in 2008.


The Board of Directors reviewed Profound's capital expenditure program in August and approved an increase from $36.5 million to $57.2 million for 2008.

This capital program did not anticipate the current pessimistic outlook for oil and natural gas prices and the uncertain economic conditions that have presented themselves. The Company has responded early, in a defensive fashion, and now anticipates that its 2008 capital program will amount to $47.7 million. The 2008 capital program now anticipates a total of $28.6 million for drilling and completing 21 wells (13 net), $14.6 for facilities and pipelines and $4.5 for land, seismic and other.

Profound is in the process of preparing its 2009 Capital Program. The program will see a restriction in capital as compared to 2008 as the Company continues to adopt a defensive posture in response to recent unprecedented volatility in both commodity and capital markets.


During the first three quarters of 2008, Profound has experienced substantial growth through the acquisition of Defiant and successful field development activity.

Although the Company has assembled an impressive inventory of over 110 gross exploration and development locations, applying capital for their development in an environment of discouraging commodity prices and uncertain capital markets is being reviewed. Profound is anticipating circumstances where value is preserved by delaying drilling when early cash flow, obtained from high decline rate gas wells, is critical to eventual economic success.

The 2009 capital program is being approached so as to ensure that capital is employed for a satisfactory return and within the Company's ability to finance. In other words, only those activities with low risk and promise to generate early cash flows will be pursued until a sense of stability in regard to commodity prices, capital markets and the impact of changing crown royalties is obtained.


Profound explores for and produces oil and natural gas in Alberta, Canada. It was formed on November 19, 2007 through the amalgamation of Profound Energy Ltd., a private oil and gas exploration and production company, and Cork Exploration Inc. a public oil and gas exploration and production company. On March 31, 2008 Profound acquired Defiant Resources Ltd., a public oil and gas company operating in Alberta.

The Company operates in central Alberta west of the fifth meridian and in the Peace River Arch area of Alberta.


Certain information regarding Profound in this news release including management's assessment of future plans, asset dispositions, production, drilling program and operations and the effect on Profound may constitute forward-looking statements under applicable securities laws and necessarily involve risks including, without limitation, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, risks associated with sour hydrocarbons, changes to the proposed royalty regime prior to implementation and thereafter, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, capital expenditure costs, including drilling, completion and facilities costs, unexpected decline rates in wells, delays in projects and/or operations resulting from surface conditions, wells not performing as expected, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources. As a consequence, actual results may differ materially from those anticipated in the forward-looking statements. Readers are cautioned that the forgoing list of factors is not exhaustive. Additional information on these and other factors that could effect Profound's operations and financial results are included in Profound's Annual Information Form on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website ( Furthermore, the forward-looking statements contained in this news release are made as at the date of this news release and Profound does not undertake any obligation to update publicly or to revise any of the forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

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 six Mcf to one bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

As an indicator of the Company's performance, the term "funds flow from operations" contained within this news release should not be considered as an alternative to, or more meaningful than, cash flow from operating activities as determined in accordance with Canadian generally accepted accounting principles ("GAAP"). This term does not have a standardized meaning under GAAP and may not be comparable to other companies. Profound believes that "funds flow from operations" is a useful supplementary measure as shareholders and/or investors may use this information to analyze operating performance, leverage and liquidity. Funds flow from operations, as disclosed within this news release, represents funds flow from operating activities before changes in non-cash operating activities working capital. The Company presents funds flow from operations per share whereby per share amounts are calculated consistent with the calculation of earnings per share.

"Total net debt" refers to projected bank debt plus estimated working capital deficit (excludes any current unrealized amounts pertaining to risk management commodity contracts). Total net debt is not a recognized measure under Canadian GAAP.

References in this news release to test production rates and test rates for recently drilled wells 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. While encouraging, readers are cautioned not to place reliance on such rates in calculating the aggregate production for the Company.

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