Rock Energy Inc.
TSX : RE

Rock Energy Inc.

March 13, 2012 20:29 ET

Rock Energy Inc. Announces 2011 Results, Successful Winter Oil Drilling and 2012 Guidance

CALGARY, ALBERTA--(Marketwire - March 13, 2012) - Rock Energy Inc. (TSX:RE) ("Rock" or the "Company") is pleased to report; its financial and operating results for the year and three months ended December 31, 2011; a strengthening fourth-quarter with improved netbacks; an update on recent successful heavy oil drilling and capital expenditure, production and cash flow guidance for 2012. With no bank debt and $10 million in cash entering March 2012, Rock is strongly positioned to carry out its 2012 program of crude oil drilling in the Plains and Southwest Saskatchewan areas.

Rock has filed its Annual Information Form (AIF), which includes Rock's reserves data and other oil and natural gas information for the year ended December 31, 2011. The AIF includes annual disclosure regarding reserves data and other oil and gas information as mandated by National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities of the Canadian Securities Administrators. Copies of Rock's audited financial statements and related management's discussion and analysis and AIF for the year ended December 31, 2011 have been filed on the SEDAR website at www.sedar.com and may be obtained on Rock's website at www.rockenergy.ca.

Rock is a Calgary-based crude oil exploration, development and production company.

CORPORATE SUMMARY

FINANCIAL Year ended
December 31, 2011
Year ended
December 31, 2010
Three Months ended December 31, 2011 Three Months ended December 31, 2010
Crude oil and natural gas revenue ($000) $
64,289
$
63,354
$
17,100

$ 15,732
Funds from operations ($000) (1) $ 20,524 $ 25,941 $ 8,063 $ 6,189
Per share - basic $ 0.56 $ 0.84 $ 0.21 $ 0.19
- diluted $ 0.55 $ 0.81 $ 0.21 $ 0.19
Net income (loss) ($000) (2) $ (6,918 ) $ 849 $ (4,991 ) $ (2,153 )
Per share - basic $ (0.19 ) $ 0.03 $ (0.13 ) $ (0.07 )
- diluted $ (0.19 ) $ 0.03 $ (0.13 ) $ (0.07 )
Capital expenditures, net ($000) $ 49,447 $ 42,282 $ 5,058 $ 12,109
As at
December 31, 2011
As at
December 31, 2010
Working capital deficiency including bank debt and excluding derivative contracts ($000) $
31,028

$ 32,364
Common shares outstanding (000) 38,786 32,754
Options outstanding (000) 2,531 2,042
OPERATIONS Year ended
December 31, 2011
Year ended
December 31, 2010
Three Months ended December 31, 2011 Three Months ended December 31, 2010
Average daily production
Crude oil and natural gas liquids (bbls/d) 2,294 2,376 2,184 2,298
Natural gas (mcf/d) 5,026 7,431 5,108 6,742
Total (boe/d) 3,132 3,615 3,035 3,472
Average product prices
Crude oil and natural gas liquids (Cdn$/bbl) $ 68.52 $ 59.95 $ 77.86 $ 63.55
Natural gas (Cdn$/mcf) $ 3.77 $ 4.19 $ 3.12 $ 3.70
Combined average (Cdn$/boe) $ 56.24 $ 48.02 $ 61.23 $ 49.26
Field netback (Cdn$/boe) (1) $ 22.81 $ 23.94 $ 29.38 $ 23.55

(1) Funds from operations, funds from operations per share and field netback are not terms prescribed by International Financial Reporting Standards (IFRS) or the previous Canadian generally accepted accounting principles (Canadian GAAP), and so are considered non-GAAP measures. Funds from operations represents cash generated from operating activities before changes in non-cash working capital and decommissioning expenditures. Rock considers funds from operations a key measure as it demonstrates the Company's ability to generate the cash necessary to fund future growth through capital investment. Funds from operations per share is calculated using the same share basis which is used in the determination of net income (loss) per share. Field netback is calculated as crude oil and natural gas revenues after deducting royalties, operating costs and transportation costs, resulting in an approximation of initial cash margin in the field on crude oil and natural gas production. Rock's use of these non-IFRS measurements may not be comparable with the calculation of similar measures for other companies.

(2) Net income for the year ended December 31, 2010 was restated for the effect of adopting IFRS.

Introduction

Last year was one of transition for Rock. The Company's focus at the start of the year was to prove up the reserves and development of its Elmworth natural gas resource play using the funds provided by its heavy oil production base. At the same time, Rock was committed to carefully monitoring and strengthening its financial position as it implemented its long term growth strategy. By mid-year the Company realized that the capital required for the Elmworth assets would far exceed the cash flow generated by its oil production, so Rock entered into a strategic review process to determine the best way forward. During the fourth quarter, the Company discovered a significant new oil pool at Mantario in Southwest Saskatchewan. Early in 2012, Rock announced the sale of its Montney natural gas assets in Elmworth for gross proceeds of $46 million which eliminated the bank debt and provided working capital that would enable the Company now to drive on as an oil producer focused on its Plains (Lloydminster and Edam) and Southwest Saskatchewan (Mantario and Onward) core areas.

Rock's 2011 Accomplishments

The Company significantly expanded its reserves as total proved plus probable reserves increased by 36 percent to 21.5 million boe at December 31, 2011 from 15.9 million boe at the end of 2010. With a focus on confirming commercial Montney liquids rich natural gas on Rock's land at Elmworth in West Central Alberta, the 2011 activity increased Rock's proved plus probable natural gas reserves by 43 percent to 74.6 bcf at year-end from 52.1 bcf at the end of 2010.

In 2011, Rock delivered lower than anticipated production results as average daily production decreased by 13 percent to 3,132 boe per day from an average of 3,615 boe per day in 2010. However, in a strong crude oil and a very weak natural gas price environment, crude oil and liquids production in 2011 was essentially flat as the production weighting increased to 73 percent crude oil and liquids from 66 percent in 2010. Based on planned activity for the remainder of this year including the aforementioned asset sale, the production weighting is anticipated to be in excess of 80 percent crude oil and liquids by the end of 2012.

This shift in weighting became clearly evident in the fourth quarter of 2011 as Rock's financial results began to improve, with higher production, revenue, netbacks and funds from operations than in the third quarter of 2011. Due to a combination of declining operating costs and improving liquids pricing, Rock's fourth-quarter 2011 netbacks climbed to $29.38 per boe versus $22.81 for the year as a whole.

Throughout 2011, Rock carefully monitored its financial position as it committed in excess of 40 percent of its 2011 capital program to a reserves growth strategy at Elmworth. To support the initiatives planned for Elmworth, Rock completed a $21 million equity financing and a $10 million flow-through equity financing in May 2011. With year-end net debt of $31.0 million, the net debt to funds flow ratio was 1.0 times the Company's annualized fourth-quarter 2011 funds flow and Rock had more than $30 million in unutilized bank debt capacity.

2011 Drilling Results

Rock drilled and cased 18 (18.0 net) heavy oil wells, two (2.0 net) heavy oil service wells, one (1.0 net) dry and abandoned well and three (3.0 net) unsuccessful heavy oil wells that were cased for water disposal in the Plains area in 2011. The Company also drilled two (1.5 net) successful natural gas wells at Elmworth in 2011 including a 100 percent working interest Montney vertical natural gas well and one 50 percent working interest Montney horizontal natural gas well that further confirmed Montney natural gas reserves in the Elmworth area. In addition, Rock drilled one (1.0 net) successful natural gas well in early 2011 on its Saxon property.

Reserves and Net Asset Value

Rock's total Company proved plus probable reserves increased by 36 percent year-over-year to 21.5 million boe at year-end 2011. All-in finding, development and acquisition costs (including changes in future development capital) averaged $19.41 per proved plus probable boe, bringing the three-year average to $17.56 per proved plus probable boe.

The year-end 2011 reserve report by GLJ Petroleum Consultants Ltd., using its January 1, 2012 price forecast, indicates a value of $199.0 million for Rock's proved plus probable reserves (net present value discounted at 10 percent, before tax).

On an adjusted basis, after the disposition of the Company's natural gas-based assets at Elmworth, Rock's proved plus probable reserves were 8.3 million boe and the net asset value is calculated as $4.17 per basic share, assuming an adjusted working capital position at year-end of $14.5 million, 80,680 net acres of land valued at $19.8 million and 38.8 million basic shares outstanding.

Further information respecting Rock's year-end reserves are contained in its AIF, as described above.

Financial Results

Rock generated funds from operations of $20.5 million ($0.56 per share) in 2011 compared to $25.9 million ($0.84 per share) in 2010. For the fourth quarter of 2011, the Company increased its funds from operations to $8.1 million ($0.21 per basic share) from $4.0 million ($0.10 per share) in the third quarter of 2011. Funds from operations for the fourth quarter were supported by increased production levels, increased crude oil prices, declining operating costs (averaging $21.70 per boe versus $22.95 per boe for the full year of 2011) and the monetization of a crude oil hedge position of $1.7 million.

The Company had a net loss of $6.9 million ($0.19 per share) in 2011 compared to net income of $0.8 million ($0.03 per share) in 2010. Effective January 1, 2011, among several newly established accounting principle changes, International Financial Reporting Standards (IFRS) require a quarterly assessment of impairment triggers by operating area as well as recording gains or losses on asset sales. The significant reduction in natural gas prices during the fourth quarter of 2011 contributed to an impairment loss on Rock's natural gas assets at Elmworth and Bigstone of $10.1 million. In addition, the sale by Rock of certain non-core natural gas assets in the first quarter of 2011 provided for a gain on sale of properties of $7.7 million in 2011.

The Company incurred net capital expenditures of $49.4 million in 2011 of which $20.8 million was focused on Elmworth Montney natural gas initiatives. Total year-end net debt was $31.0 million against available bank lines of $62 million. Subsequent to the disposition of the Elmworth natural gas assets in February 2012, the available bank lines were reviewed and reduced to $45 million (with no amount drawn) subject to a review in May 2012.

Strategic Alternatives to Maximize Shareholder Value

Rock made significant progress on its Elmworth assets in West Central Alberta in 2011 as it established a strong land base, delineated the resource potential, proved up the commerciality of the liquids-rich natural gas play and identified a number of viable natural gas handling alternatives to produce the resource. Similarly, several larger-scale industry peers were experiencing comparable success on their activities at Elmworth and were accelerating their capital spending plans in the area accordingly. As a significant amount of capital and related infrastructure would be required at Elmworth to maximize value in the area, in August 2011 Rock announced its plan to seek strategic alternatives to maximize value for its shareholders.

The following month, Rock's Board of Directors established a special committee that engaged FirstEnergy Capital Corp. ("FirstEnergy") as financial advisor to help identify strategic alternatives for Rock to maximize shareholder value.

Throughout the fourth quarter of 2011, Rock and FirstEnergy completed a detailed Information Memorandum, opened a data room and made presentations to interested parties. In January 2012, Rock completed an evaluation of all identified strategic alternatives and in February 2012 announced that it had entered into purchase and sale agreements with two Canadian oil and natural gas producers, closing the sale of its Montney natural gas assets at Elmworth for gross proceeds of $46 million.

Rock used the proceeds from the sale of the Elmworth assets to eliminate its bank debt and provided an additional $10 million of cash. Following the Elmworth sale, the Company's bank facility was reduced to $45 million.

With its strong balance sheet, available bank line and inventory of crude oil drilling locations, Rock is well positioned to execute its new business plan, grow oil production through the drill bit, and pursue strategic acquisitions/mergers to complement its asset base.

2012 Area Activity Update

To date in 2012 Rock has drilled 7 (7.0 net) wells as part of its planned 21-well program for this year.

Rock drilled five (5.0 net) wells at Onward, a heavy oil property acquired by the Company in February 2011 for $13.2 million. This included two producing oil wells and three water injection wells as Rock initiates a comprehensive waterflood program on one pool and optimizes a program on a second, well-established 15-year-old waterflood project. These initiatives are expected to increase heavy oil production on the asset from the current 300 barrels per day to nearly 500 barrels per day by the first quarter of 2013.

In addition to the drilling activity at Onward, Rock acquired 5,700 net acres of undeveloped land on its new Mantario heavy crude oil exploration area in Saskatchewan, following up on a successful 100 percent working interest test well that was drilled, completed and put on production in the fourth quarter of 2011 at a sustained production rate of approximately 80 barrels per day. The success of the test well in this area was followed up with two additional adjacent 100 percent working interest wells drilled in the first quarter of 2012 as part of a planned 14-well drilling program for 2012. The drilling program in this area has been supplemented with a 42-square-kilometre 3D seismic program that was completed in the first quarter of 2012 and will be evaluated in the second quarter. It will be used to support a planned drilling program in the area for the remainder of 2012 and into 2013.

Outlook and 2012 Guidance

During 2011 Rock took the steps needed to transition itself from a company with a foundation of heavy oil production and a natural gas resource play requiring significant capital, to one entirely focused on oil plays in the Plains and Southwest Saskatchewan regions. These are oil prone areas where the Company has expertise, plays are accessible year-round, well costs are within Rock's financial capability, third-party processing infrastructure is not required and Rock can apply proven production practices to improve recovery factors. To prosper in this industry, a company needs to focus on projects that generate early significant cash flow - in this price environment, these are oil targets - that it can then re-invest to continue to grow the production and cash flow, so that it can afford to discover and develop resource plays that are scalable and repeatable. The team at Rock has acquired and discovered two significant projects that meet these criteria, and also assembled a meaningful inventory of additional acquisition and exploration prospects. These projects and inventory are laying the foundation for Rock's future as the team works to build a solid, oil-based company.

For 2012 Rock has an approved capital budget of $30 million that is expected to provide growth in daily crude oil production by the end of the year. The capital program includes an anticipated $14 million focused on the crude oil program on Rock's new Mantario exploration area in Southwest Saskatchewan and an anticipated $10 million for heavy oil waterflood initiatives associated with the development of its Onward asset. The remainder of the capital program will target optimizing the Company's heritage heavy oil assets with a focus on production optimization and ongoing operating cost reductions ($3 million) as well as investments in land and seismic. Rock's drilling plan includes an estimated 21 wells and is expected to provide 2012 average production in the range of 2,500 boed to 2,700 boed and generate funds flow of approximately $23 million ($0.60 per share).

As Rock approaches the second quarter of 2012, the Company is excited about its crude oil-focussed initiatives in Saskatchewan. With the disposition of its Deep Basin natural gas resource assets at Elmworth, Rock has the funds provided by its crude oil production, and the debt-free balance sheet needed to support production and reserves growth in 2012 and beyond.

Advisory Regarding Forward-Looking Information and Statements

This press release contains forward-looking statements and forward-looking information within the meaning of applicable securities laws. The use of any of the words "will", "expects", "believe", "plans", "potential" and similar expressions are intended to identify forward-looking statements or information. More particularly and without limitation, this press release contains forward looking statements and information concerning: 2012 average production; anticipated production rates from the Onward waterflood program; and Rock's drilling plans on its crude oil properties.

Statements relating to "reserves" are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described can be profitably produced in the future.

The forward-looking statements and information in this press release are based on certain key expectations and assumptions made by Rock, including prevailing commodity prices and exchange rates; applicable royalty rates and tax laws; future well production rates; reserve and resource volumes; the performance of existing wells; the success obtained in drilling new wells; the sufficiency of budgeted capital expenditures in carrying out planned activities; the availability and cost of labour and services; and the receipt, in a timely manner, of regulatory and other required approvals. Although Rock believes that the expectations and assumptions on which such forward-looking statements and information are based are reasonable, undue reliance should not be placed on the forward-looking statements and information because Rock can give no assurance that they will prove to be correct. There is no certainty that Rock will achieve commercially viable production from its undeveloped lands and prospects.

Since forward-looking statements and information address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to, the risks associated with the oil and natural gas industry in general, such as: operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections relating to reserves, production, costs and expenses; health, safety and environmental risks; commodity price and exchange rate fluctuations; marketing and transportation of petroleum and natural gas and loss of markets; environmental risks; competition; incorrect assessment of the value of acquisitions; failure to realize the anticipated benefits of acquisitions; ability to access sufficient capital from internal and external sources; stock market volatility; and changes in legislation, including but not limited to tax laws, royalty rates and environmental regulations.

Readers are cautioned that the foregoing list of factors is not exhaustive. Additional information on these and other factors that could affect the operations or financial results of Rock are included in reports on file with applicable securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com). The forward-looking statements and information contained in this press release are made as of the date hereof and Rock undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.

Contact Information

  • Rock Energy Inc.
    Allen J. Bey
    Chief Executive Officer
    403-218-4380

    Rock Energy Inc.
    John H. Van de Pol
    President and Chief Financial Officer
    403-218-4380
    www.rockenergy.ca