Purcell Energy Ltd.
TSX : PEL

Purcell Energy Ltd.

August 15, 2005 18:13 ET

Purcell Energy Increases Production and Cash Flow in Q2, Announces Reorganization and Asset Sale

CALGARY, ALBERTA--(CCNMatthews - Aug. 15, 2005) - Purcell Energy Ltd. (TSX:PEL)
continued its active program through the second quarter of 2005 and realized significant gains in production and cash flow. New production at Tenaka in northeast British Columbia and at Tatagwa in Saskatchewan lifted production over the first quarter by 15 percent to 4,690 boe/d. Strong commodity prices combined with the higher production resulted in cash flow increasing to $8.8 million, up 47 percent from first quarter 2005, and up 37 percent from the same period in 2004.

On August 2, 2005, Purcell announced a corporate reorganization and asset sale designed to unlock the value of the Company's various components. The result will be two strong, focused junior companies derived from Purcell, the elimination of all debt and a payment to shareholders in the form of cash and shares of a third party junior company.



Highlights
------------------------------------------------------------------------
($ thousands, except Three Months to June 30 Six Months to June 30
where indicated, 2005 2004 % 2005 2004 %
6 mcf = 1bbl) (Restated) change (Restated) change
(4) (4)
------------------------------------------------------------------------
FINANCIAL

Petroleum and natural
gas sales 20,165 16,208 24 36,392 33,668 8
Production expenses 4,649 3,972 17 8,468 7,197 18
Per unit ($/BOE) 10.89 9.27 18 10.66 8.28 29
Transportation expenses 1,446 1,268 14 2,860 2,751 4
Per unit ($/BOE) 3.39 2.96 14 3.60 3.16 14
G&A expenses 962 892 8 1,930 1,762 10
Per unit ($/BOE) 2.26 2.08 9 2.43 2.03 20
Funds flow from
operations 8,804 6,444 37 14,792 14,685 1
Per share - basic ($) 0.177 0.130 36 0.297 0.295 1
Per share - diluted ($) 0.177 0.129 37 0.297 0.295 1
Depletion, depreciation
and amortization 8,182 5,206 57 15,338 10,480 46
Per unit ($/BOE) 19.17 12.15 58 19.30 12.06 60
Net income (loss) 541 11 4,951 (490) 1,815 (127)
Per share - basic ($) 0.011 - - (0.010) 0.036 (128)
Per share - diluted ($) 0.011 - - (0.010) 0.036 (128)
Capital expenditures,
net (2) 10,032 5,298 89 6,123 23,779 (74)
Total long term
financial liabilities 3,990 4,660 (14) 3,990 4,660 (14)
Net Debt (3) 73,269 66,585 10 73,269 66,585 10
Shareholders' equity 98,898 100,533 (2) 98,898 100,533 (2)
Common shares
outstanding
Weighted average
- basic 49,759 49,735 - 49,792 49,794 -
Weighted average
- diluted 49,864 49,766 - 49,848 49,822 -
------------------------------------------------------------------------



------------------------------------------------------------------------
($ thousands, except Three Months to June 30 Six Months to June 30
where indicated, 2005 2004 % 2005 2004 %
6 mcf = 1bbl) (Restated) change (Restated) change
(4) (4)
------------------------------------------------------------------------
OPERATING
Production
Gas (mmcf/d) 21.18 21.84 (3) 19.38 22.51 (14)
Crude oil and liquids
(bbls/d) 1,160 1,070 8 1,159 1,025 13
Equivalent (BOE/d) 4,690 4,710 (1) 4,390 4,776 (8)
Product prices (1)
Natural gas ($/mcf) 7.56 6.01 26 7.26 6.36 14
Oil and liquids ($/bbl) 53.04 43.87 21 51.98 40.78 27
Equivalent ($/BOE) 47.25 37.82 25 45.80 38.73 18
Net back
Operating ($/BOE) 25.50 18.96 34 23.83 20.86 14
Funds flow ($/BOE) 20.63 15.04 37 18.62 16.90 10

(1) Product prices include realized gains and losses on hedges.
(2) Includes additions to asset retirement obligations and property
dispositions.
(3) Excludes the unrealized risk management liability.
(4) Restated for change to mark-to-market accounting of non-hedge
designated risk management contracts. See note 2 to the consolidated
financial statements.
------------------------------------------------------------------------


Reorganization and Asset Sale

Management and directors of Purcell recognized that the sum of the value of the separate parts of the Company is greater than the current valuation of Purcell on the stock market. The reorganization and asset sale will accomplish the following:

- Shareholders will continue to be exposed to the upside potential of Purcell's Alberta assets through ownership of Prairie Schooner Petroleum Ltd. ("Prairie Schooner") shares;

- Shareholders will continue to be exposed to the upside potential of the Tenaka natural gas play through ownership of a debt-free, B.C.-focused exploration company ("Tenakaco");

- Shareholders will remain owners of a re-branded, debt-free company with new management that will focus on maximizing the value of Purcell's Fort Liard property; and

- The asset sale will enable payment of all debt and costs of the reorganization, as well as provide for the payment of cash to shareholders.

The reorganization will be pursuant to a plan of arrangement (the "Arrangement"). As a result of the Arrangement, Purcell shareholders will retain their Purcell common shares, which will be consolidated on a one-for-five basis. For each pre-consolidated Purcell common share held, shareholders will also receive 0.20 of a share in a new exploration-focused, natural gas production company holding the Company's Tenaka assets and undeveloped B.C. acreage. At the same time, as a result of the asset sale, shareholders will receive approximately $0.40 in cash and 0.0556 of a Prairie Schooner common share (equivalent to one Prairie Schooner share for 18 Purcell common shares). Closing of the reorganization and asset sale under a plan of arrangement is expected to occur in October 2005.

The reorganization is the culmination of a year-long process by Purcell to seek alternatives to maximize shareholder value. Through this process, the board of directors has investigated or considered numerous options, including outright sale of the company, merger, or sale of a smaller amount of assets and continuing forward with Purcell. The board of directors believes that the reorganization is in the best interest of shareholders. The asset sale and the Arrangement (collectively, the "Transactions") have the unanimous support of the board of directors of Purcell. The directors are of the opinion that the Transactions will maximize shareholder value through ownership in three companies: Tenakaco, the refocused Purcell, and Prairie Schooner, while achieving attractive valuations for the assets that are being sold (which will eliminate debt and provide a cash payment to shareholders). The Transactions will be completed by the sale of a portion of the assets through a partnership structure, which will provide tax-efficiencies for Purcell and its shareholders. After completion of the Transactions, certain members of the existing Purcell management team and board of directors will be included in the management teams and boards of directors of either Tenakaco or Purcell. The respective management teams and boards have not been finalized and will be announced as soon as possible.

The Transactions will be subject to approval by securityholders of Purcell holding at least 66 2/3 percent of the securities of Purcell represented in person or by proxy at the special meeting. It is anticipated that an information circular detailing the Transactions will be mailed to securityholders in September 2005. The meeting of securityholders to approve the Transactions will be held in October 2005. If the requisite securityholder, regulatory and stock exchange approvals are obtained, Purcell will as soon as possible thereafter seek an order from the Alberta Court of Queen's Bench approving the Arrangement. The Transactions, which will close contemporaneously, are expected to close in October 2005.

Attributes of Tenakaco

Tenakaco will be a natural gas-focused junior that will expose its shareholders to significant upside potential as it develops the Tenaka Slave Point project and pursues its other high-impact deep gas prospects in northeast B.C.

Pursuant to the Arrangement, Purcell will transfer the Tenaka natural gas property and all of its undeveloped B.C. acreage to Tenakaco in consideration for approximately 10,800,000 common shares of Tenakaco that will be distributed to Purcell shareholders. The Tenaka natural gas property includes current production of 650 boe/d. As evaluated by Gilbert Laustsen Jung Associates Ltd. ("GLJ") at March 31, 2005, the Tenaka proved reserves are 1,027,000 boe and proved plus probable reserves are 1,829,000 boe. The Tenaka acreage encompasses approximately 85,500 gross (36,500 net) acres of contiguous lands covering 125 gas spacing units at an average working interest of 42.6 percent.

Purcell has identified up to 12 drilling locations on 3D seismic, including follow-up locations to this past winter's drilling and other separate prospects. Additional contingent drilling locations are being developed. Purcell's plans are that Tenakaco will drill at least four wells in winter 2006. A further 91,396 net acres of undeveloped land will also be transferred to Tenakaco, as well as several minor producing properties.

Attributes of Purcell

On closing of the Transactions, Purcell's significant asset will be the Fort Liard natural gas property located in the southwest Northwest Territories. This property currently produces about 600 boe per day net to Purcell from three wells. During the remainder of 2005, workovers and recompletions of existing wells have the potential to increase production and reserves. Also, Purcell anticipates that new wells will be drilled. Fort Liard remains valuable with a large amount of original gas in place. The potential for improving recovery factors on the pool provides significant upside, both in production and reserves.

In addition to the Fort Liard property, Purcell will retain an extensive seismic database in the N.W.T. and Alberta. Also, Purcell will retain several minor producing and undeveloped properties in Alberta and B.C. Current production from the minor properties is 70 boe per day, with as much as 200 boe per day behind pipe pending recompletions and tie-ins. Purcell will retain undeveloped lands totaling 7,500 net acres. After closing of the Transactions, Purcell will be a debt-free company with significant cash flow from the Fort Liard property. After completion of the Transactions, Purcell intends, if circumstances permit, to implement a dividend policy whereby a portion of the Fort Liard cash flow will be paid to shareholders on a quarterly basis.

Purcell anticipates bringing in a new management team to run this company and changing the name to reflect the reorganization.

Asset Sales

The Alberta asset sale comprises substantially all of Purcell's oil and gas reserves, production and undeveloped lands in Alberta. The Alberta asset sale also includes several producing properties in B.C., and excludes several minor producing and undeveloped properties in Alberta and B.C., which will be retained by Purcell. The Saskatchewan asset sale comprises all of Purcell's properties in Saskatchewan.

Current production from the Alberta and Saskatchewan asset sales is approximately 3,150 barrels of oil equivalent ("boe") per day, net to Purcell. The total consideration of $151,000,000, less 135,000 net acres of undeveloped lands valued at $11,000,000, equates to about $44,700 per flowing boe per day. Based on a March 31, 2005 reserves evaluation by GLJ, the asset sales included proved reserves of 6,813,000 boe and proved and probable reserves of 9,027,000 boe. The asset sale values the reserves at $20.55 per proved boe and $15.51 per proved and probable boe, after accounting for undeveloped land.

The Saskatchewan asset sale and Alberta asset sale are subject to the usual and customary conditions in a transaction of this nature, including receipt of all necessary regulatory, stock exchange and shareholder approvals, completion of due diligence, waiver or compliance with any consents, rights of first refusal or other restrictions on the asset sale and the absence of any material adverse changes to the relevant properties. The Alberta assets sale includes a break fee of $4,000,000 payable by Purcell if the sale is not completed as a result of failure to receive shareholder or regulatory approvals.

Drilling and Operations Update

In the second quarter of 2005, Purcell drilled 9 (4.8 net) wells, resulting in 5 (2.2 net) gas wells, 2 (1.1 net) oil wells and 2 (1.5 net) dry holes. One of the wells drilled was exploratory, while the remaining 8 wells were development wells. Wells were drilled at Pembina (2), Minnehik (2), Barrhead (2), and Ethel South (1) in Alberta, and at Tatagwa (2) in southeast Saskatchewan.

Second quarter production was 4,690 boe/d compared to 4,086 boe/d in the first quarter. This is less than the 4,900 boe/d forecast by the company for the second quarter as a result of weather-related delays in tieing in new production, deferral of Fort Liard workover activity to the third quarter by the operator and a slow-down in activity related to the shareholder value-maximization process culminating in the Transactions. New production came from Tenaka in B.C., Pembina, Alberta and Tatagwa in southeast Saskatchewan.

Outlook

As commodity prices for oil and gas continue to move higher, the timeliness of the reorganization and asset sale is apparent. The Transactions will restructure the corporate affairs of Purcell to the maximum benefit of our shareholders, while ensuring that our shareholders continue to have the opportunity to profit from the long term potential of our key assets.

We greatly appreciate the loyalty and support of our shareholders and employees as we culminate the twelve-year history of Purcell and set in motion two new, dynamic companies that we are confident will reward shareholders with strong returns.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion is management's analysis of Purcell Energy Ltd.'s ("Purcell" or the "Company") operating and financial data for the second quarter of 2005 and prior periods, as well as estimates of future operating and financial performance based on information currently available. It should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2004. The Management's Discussion and Analysis ("MD&A") was prepared as of August 12, 2005. Additional information relating to Purcell can be found at www.sedar.com and on Purcell's website at www.purcellenergy.com.

Comparisons made of the current period to the previous year are to the corresponding period in the previous year unless otherwise indicated.

Readers are advised that certain cautionary statements in the MD&A in the annual report for the year ended December 31, 2004 are not repeated herein but apply to this MD&A. The relevant discussions are entitled "Basis of Presentation", "Non-GAAP Measurements", "boe Presentation" and "Forward-Looking Statements."

Second Quarter 2005 Overview

Financial results were positively impacted by increased production as well as commodity prices that continued to strengthen during the second quarter of 2005. Oil prices were up by 4.2 percent and natural gas prices up by 9.4 percent from the first quarter of 2005. Production was less than expected in the second quarter because of weather-related delays in tieing in new production, deferral of Fort Liard workover activity to the third quarter by the operator and a slow-down in Purcell's activity related to the shareholder value-maximization process culminating in the reorganization and asset sale announced on August 2, 2005.

Results of Operations

Production

Average production increased by 15 percent in the second quarter of 2005 compared to the first quarter of 2005 reflecting production from new wells located at Tenaka, British Columbia; Pembina, Alberta; and Tatagwa, Saskatchewan.

Average production declined one percent in the second quarter of 2005 compared to the same period in 2004 reflecting the sale of producing assets early in 2005 and production declines of 756 boe/d at Fort Liard, offset by production from new wells drilled and tied in over the past year in Alberta, British Columbia and Saskatchewan.

Purcell's production in the second quarter was weighted 75 percent to natural gas, compared to 77 percent in the same period of 2004. It is expected that Purcell's production will remain heavily weighted to natural gas for the remainder of 2005. Production is currently at approximately 4,700 boe/d.

Revenue

Petroleum and natural gas sales of $20.2 million for the second quarter of 2005 were higher than 2004, reflecting a 25 percent increase in commodity prices received on a relatively flat production base. For the first six months of 2005, sales revenue increased by eight percent over 2004 as a result of 18 percent higher average commodity prices received, offset by eight percent lower average production. Commodity prices are expected to remain strong for the remainder of 2005.

During the second quarter of 2005, approximately 4.8 mmcf/d of natural gas and 300 bbls/d of crude oil, representing about 23 percent of the Company's total production, were delivered into forward contracts. During the first six months of 2005, approximately 5.9 mmcf/d of natural gas and 151 bbls/d of crude oil, representing about 26 percent of the Company's total production, were delivered into forward contracts. The prices received pursuant to the forward contracts reduced average prices received for natural gas by $nil per mcf and $0.08 per mcf for the second quarter and first six months of 2005, respectively, and reduced prices received for crude oil by $16.45 per barrel and $8.28 per barrel for the second quarter and first six months of 2005, respectively. As a result, the Company's hedging program resulted in sales reduced by $1,737,000 and $2,004,000 in the second quarter and the six months ended June 30, 2005, respectively. For the remainder of 2005, approximately 4.76 mmcf per day of natural gas and 200 barrels per day of crude oil are contracted for delivery at average minimum prices of CAD $6.04 per mcf and CAD $56.75 per barrel and average maximum prices of CAD $8.78 per mcf and CAD $56.75 per barrel.

Expenses

In the second quarter of 2005, strong demand for services and materials continued to push-up costs in all sectors of the oil and gas industry. This is due to a robust economy and high oil and natural gas prices.

Transportation costs were slightly higher in the second quarter of 2005 compared to 2004 despite the mitigation of firm service contracts related to natural gas production from the Fort Liard area. Per unit transportation costs were higher due to lower production volumes associated with the firm service contracts. Transportation costs made up a lower percentage of sales during the second quarter of 2005 as sales were elevated due to higher oil and natural gas prices.

Fort Liard transportation costs are lower as a result of mitigating and releasing certain obligations. Additional Fort Liard transportation obligations are to be released on November 1, 2005. British Columbia transportation is higher as a result of the new production at Tenaka.

Production expenses increased in the second quarter of 2005 over the same period in 2004 mainly as a result of workovers initiated at Fort Liard and lower recoveries of facility costs from partners because of less production from the F-25 well. Operating costs in British Columbia were lower as a result of the mitigation and release of certain firm treatment services and lower cost new production at Tenaka. The mature Saskatchewan properties continue to have higher operating and maintenance costs, although production from the new Tatagwa oil discovery will reduce future operating costs.

General and administrative ("G&A") costs, per unit of production, increased by 20 percent in the first six months compared with 2004 mainly due to lower production in 2005. Personnel costs stabilized as a result of fewer consultants employed following the integration of the 2003 BelAir acquisition.

Depletion, depreciation and amortization ("DD&A") increased in the second quarter by 57 percent (58 percent on a unit of production basis) and increased in the first six months by 46 percent (60 percent on a unit of production basis) compared with 2004 mainly due to the significant reduction of reserves at Fort Liard booked in the fourth quarter of 2004. Depletion, on a unit of production basis, is expected to decline over the remainder of 2005 reflecting the successful drilling in the first six months.

Accretion of the asset retirement obligation decreased in the first six months of 2005 as a result of the disposal of liabilities associated with the properties that were sold during the first quarter.

Interest expense was higher in the first six months of 2005 compared with 2004 as a result of 6.7 percent higher effective bank interest rates during 2005 and 6.2 percent higher average levels of bank debt offset by 4 percent lower average debenture principle outstanding.

Income Taxes

The Company is not currently taxable except for the federal large corporation tax and provincial capital taxes. Tax pools at the end of the first quarter were approximately $140 million subject to verification by the income tax authorities. Based on current forecasts, and not considering the effect of selling properties, the Company is not expecting to pay any cash taxes prior to 2007.

Net Income (Loss) and Funds Flow from Operations

Purcell reported a net loss of $0.49 million for the six months ended June 30, 2005 and a net income of $0.54 million for the second quarter. The first half net loss is primarily attributable to lower production at Fort Liard, higher depletion expense and a $1.27 million unrealized risk management loss related to mark-to-market accounting of forward commodity contracts. The second quarter net income is partially attributable to the $0.70 million unrealized risk management gain recorded during the period.

Funds flow from operations of $8.8 million in the second quarter of 2005 was 37 percent higher compared with 2004 mainly due to higher commodity prices received. Funds flow from operations for the first six months of 2005 was relatively unchanged compared with 2004 due to higher commodity prices received being offset by lower production.

Capital Program

Purcell invested $19.8 million in capital projects during the first six months of 2005 and sold properties for net proceeds of $13.7 million. The capital program was funded by cash flow from operations and working capital. Purcell's capital program in the first half of 2005 targeted six exploratory and nine development drilling opportunities and resulted in three significant natural gas discoveries in the first quarter at Tenaka, B.C. and a significant oil discovery in Saskatchewan at Tatagwa in the second quarter. The Tenaka area presents the Company with multi-year exploratory and development opportunities.

Liquidity and Capital Resources

At June 30, 2005, net debt decreased to $73.3 million from the $81.8 million at December 31, 2004. This decrease was due primarily to the sale of minor properties for net proceeds of $13.1 million in the first quarter. Purcell's net debt represents a debt-to-funds flow ratio of 2.08 to 1 on annualized second quarter 2005 funds flow from operations. Management remains committed to achieving more conservative debt levels as evidenced by the announced asset sale and corporate reorganization.

Bank Credit Facility

During the first quarter, the Company's revolving demand credit facility was reduced to $59.5 million from $65 million as a result of the sale of minor properties for gross proceeds of $14 million. Subsequent to June 30, 2005, the facility credit limit was increased to $62 million upon completion of the annual review by the bank. At June 30, 2005 approximately $57.1 million of the facility was drawn.

Quarterly Report

Purcell Energy's complete second quarter report will be made available at www.sedar.com and on Purcell's website at www.purcellenergy.com. A conference call will not be held for the second quarter results. The August 2, 2005 conference call outlining the corporate reorganization and asset sale is still available through Purcell's website.

This news release contains forward-looking financial and operational information with respect to Purcell, including earnings, cash flow, production, and capital expenditures projections. These projections are based on the Company's expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from forecasts. These risks and uncertainties include general economic, market and business conditions, commodity prices, well production rates, drilling success, timing, the imprecise nature of reserves estimates, service industry conditions, and the successful implementation of the company's business strategy. There is no representation by Purcell that actual results achieved during the forecast period will be the same, in whole or in part, as those forecast.

Note

In this news release the term barrel of oil equivalent ("boe") may be misleading, particularly if used in isolation. A boe conversion ratio of one boe for 6,000 cubic feet of natural gas is based on an energy-equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. All boe conversions in this news release are derived by converting gas to oil in the ratio of six thousand cubic feet of gas to one barrel of oil.

Contact Information

  • Purcell Energy Ltd.
    Jan M. Alston
    President & C.E.O.
    (403) 269-5803
    or
    Purcell Energy Ltd.
    Bruce Murray
    C.O.O.
    (403) 269-5803
    Website: www.purcellenergy.com
    or
    Iradesso Communications Corp.
    Peter D. Knapp
    (403) 503-0144 ext. 202