RedStar Oil & Gas Inc.

RedStar Oil & Gas Inc.

April 02, 2007 20:58 ET

RedStar Oil & Gas Inc. Announces Financial and Operating Results for the Year Ended December 31, 2006

CALGARY, ALBERTA--(CCNMatthews - April 2, 2007) -


RedStar Oil & Gas Inc. (TSX:RED) ("RedStar" or the "Company") is releasing its financial and operating results for the year ended December 31, 2006. Highlights from the fourth quarter and year ended December 31, 2006, include:

- During the year, the Company drilled 20 (16.4 net) wells with a success rate of 60% which added approximately 8,394 MMcf of natural gas (1,399,000 barrels of oil equivalent) of proved plus probable reserves.

- Average production for 2006 increased by 141% to 996 boe/d from 412 boe/d in 2005.

- RedStar's current production is estimated at 1,350 boe per day with an additional 275 boe per day constrained due to third party pipeline bottlenecks and an additional 250 boe per day "behind pipe" that we expect to follow-up with further drilling, completion and tie-in activities next winter.

- In December, RedStar entered into a $20 million joint venture on its farm-in lands in the Greater Sierra area with a private oil and gas company (the "Partner") pursuant to which the Partner has committed to fund $20 million of drilling, completion and tie-in activities for a 50% working interest on all future drilling activities in the Greater Sierra area. This joint venture allows RedStar to complete its 2007 capital programs at no capital cost to the Company.

- The Company and its Partner expect to drill approximately 15 exploration or development wells in Northeastern British Columbia in 2007 of which nine have been drilled to date.

- The Company is eager to drill its first summer well which is targeting the Keg River formation and is situated in a reef complex located between two pools that have produced between 29 bcf and 48 bcf of gross production. The net interest in the well is 30% and will be drilled at no capital cost to RedStar.

- The Company completed six separate sales of portions of its 3D seismic data to independent oil and gas producers operating in the Cutbank Ridge area netting RedStar approximately $11.2 million of which $5.6 million was sold in the fourth quarter. Proceeds from the sales were used to reduce debt and working capital deficiencies. RedStar expects to complete additional 2007 seismic sales.

- During the fourth quarter of 2006, RedStar graduated from the TSX Venture Exchange to the Toronto Stock Exchange.

Operating and Financial Summary

For the For the For the For the
three three twelve seven
months months months months
ended ended ended ended
($ thousands, except December 31, December 31, December 31, December 31,
per share amounts) 2006 2005 2006 2005
------------------------ ------------ ------------ ------------ ------------

Petroleum and natural
gas sales, net
of royalties 2,021 2,684 9,409 4,099
Net income (loss) (26,593) (569) (29,534) (925)
Per share - basic (0.74) (0.02) (0.83) (0.044)
- diluted (0.74) (0.02) (0.83) (0.044)
Funds flow from
operations (non GAAP) 416 1,523 2,633 2,207
Per share - basic 0.01 0.05 0.07 0.10
- diluted 0.01 0.05 0.07 0.10
Net capital expenditures (4,245) 14,348 41,849 42,144
Average daily production
(boe/d) 914 589 996 412
Average natural gas
pricing ($/mcf) 6.11 11.13 6.08 10.35
Average pricing ($/boe) 36.65 68.67 36.64 64.01
Weighted average shares
outstanding (000s) 35,771 28,596 35,771 21,061

RedStar began 2006 with a successful first quarter drilling program in the Greater Sierra area of Northeast British Columbia, increasing production by 59% from approximately 700 boe per day to approximately 1,100 boe/d at year end 2006 and increasing reserves year over year by 135%, from 1,104 Mboe (proven plus probable) to 2,592 Mboe (proven plus probable). RedStar's sales of $11.2 million in seismic data throughout 2006 enabled the Company to exit 2006 with a net debt level of $7.0 million which is approximately 1.4 times forecasted 2007 cash flow. Potential future seismic sales are expected, with the proceeds to be used to either increase activity levels and/or further reduce the Company's debt.

The net loss for the year ended December 31, 2006 of $29.5 million was primarily the result of an impairment provision of $36.5 million due to the following factors: the Company elected to take an impairment charge on its Greater Sierra seismic databases in the amount of $26.7 million by writing down the seismic to its estimated future sales value, lower than estimated natural gas prices; higher operating costs and a negative revision on RedStar's a-56-b Pine Point well where high decline rates reduced probable reserves by approximately 2,596 MMcf.

Throughout 2006, RedStar focussed on lowering its operating costs, and was successful in decreasing transportation and processing costs, which make up the majority of our operating costs, by approximately 14%. We will continue to work on reducing the Company's processing fees, transportation costs and administration costs in order to strengthen 2007 netbacks.

In the fourth quarter of 2006, the Company completed three operations which resulted in two successful re-completions and one dry hole. One of the re-completions was a behind-pipe well from our first quarter 2006 program in the Greater Sierra area which flow tested at a stable rate of approximately 1,000 Mcf/d with a drawdown of less than 6%. This well conservatively represents 250 boe/d of "behind-pipe" production. The second completion resulted in another successful well that flow tested at a stable rate of approximately 2,225 Mcf/d with a draw down of less than 2%. This well has been tied in and is on production at a restricted rate due to third party capacity issues. Currently, RedStar has approximately 275 boe per day of constrained production due to pipeline bottlenecks in the Greater Sierra area as a result of high line pressure and constrained third-party compression capacity. The operators are investigating installing either field booster compression and/or additional plant compression to reduce these bottlenecks. Including RedStar's 2007 winter drilling program, current production is estimated at 1,350 boe per day with up to an additional 250 boe per day behind pipe.

The Company's 2006 joint venture arrangement provided RedStar with $20 million of capital ($10 million net) to continue with its 2007 drilling program and portfolio development in a weakened equity market at no capital cost to the Company. In the first quarter of 2007 RedStar drilled nine of the sixteen wells planned for its 2007 drill program. Of the first nine wells were drilled in the Greater Sierra area, four have been tied in and are on production, two are planned be tied in next winter, and three were dry and abandoned.

RedStar continues to inventory prospects and has identified over 20 shallow locations and five deep high-reward locations in North-eastern British Columbia. In addition, the Company has over 30 locations in Southwest Saskatchewan.


The last year was a difficult one for the oil and gas industry. Service and operating costs were extremely high and commodity price volatility made for a challenging environment to operate and forecast in. So far in 2007 we have seen a decline in the cost of many of our services due primarily to reduced industry activity levels leading to increased competition in the service sector. The outlook for natural gas prices is favourable as gas inventory levels are back in line with historical averages and curtailed drilling activities have lead to a reduction in pipeline receipts. As a result, we feel that the margins for natural gas producers in the industry should improve.

RedStar remains positive on the future development of its existing opportunities in 2007. RedStar's current financial flexibility, combined with additional sales proceeds from its seismic data bases, will allow it to continue with the development of its shallow and deeper prospects in north-eastern British Columbia and explore on its large undeveloped acreage in Saskatchewan. RedStar's major industry partner has plans to drill several deeper wells this summer in areas where RedStar has identified significant shallow gas potential. Favourable well log results from our partner's wells could result in two new development areas for RedStar in the fall of 2007 and winter of 2008.

With a budgeted capital program of $25 million, RedStar is forecasting production to average 1,300 to 1,400 boe per day in 2007 and 2007 exit production levels of 1,500 to 1,700 boe per day.

RedStar has filed its Annual Information Form which contains the annual National Instrument 51-101 F1, F2 and F3 information, the Company's year-end 2006 financial statements and Management's Discussion and Analysis on SEDAR. These documents can be accessed electronically from the SEDAR system at, or at

Cautionary Statements

Certain information set forth in this document, including management's assessment of future plans and operations, contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond this party's control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the lack of availability of qualified personnel or management, stock market volatility and ability to access sufficient capital from internal and external sources. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. Actual results, performance or achievement could differ from those expressed in, or implied by, these forward-looking statements, and accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits will be derived there from. RedStar disclaims any intention or obligation to update or revise any forward-looking statements that are a result of new information, future events, or otherwise except as required in accordance with applicable securities laws.

Per barrel of oil equivalent amounts have been calculated using a conversion of six thousand cubic feet of natural gas to one barrel of oil equivalent (6:1). (Barrel of oil equivalents (boe) may be misleading, particularly if used in isolation. A boe conversion ratio of 6mcf:1bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.)

The TSX Inc. has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.

Contact Information

  • RedStar Oil & Gas Inc.
    Chester J.R. Krala
    President and Chief Executive Officer
    (403) 699-3069
    RedStar Oil & Gas Inc.
    Lawrence F. Walter
    Chief Financial Officer
    (403) 699-3061