Rock Energy Inc.
TSX : RE

Rock Energy Inc.

May 10, 2011 21:10 ET

Rock Energy Reports Financial and Operating Results for First Quarter of 2011 and Executive Appointment

CALGARY, ALBERTA--(Marketwire - May 10, 2011) - Rock Energy Inc. (TSX:RE) ("Rock") announces its financial and operational results for the three months ended March 31, 2011. Rock has filed its unaudited condensed interim Consolidated Financial Statements for the period ended March 31, 2011 and related Management's Discussion and Analysis ("MD&A"). Copies of Rock's materials may be obtained on www.sedar.com and on its website at www.rockenergy.ca

Certain selected financial and operations information for the three months ended March 31, 2011 and the 2010 comparatives are set out below and should be read in conjunction with Rock's unaudited condensed interim Consolidated Financial Statements and MD&A.


----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                             Three months      Three months 
                                           ended March 31,   ended March 31,
FINANCIAL                                            2011            2010(2)
----------------------------------------------------------------------------
Crude oil and natural gas revenue ('000)       $   16,062        $   16,840 

Funds from operations ('000) (1)               $    4,452        $    6,963 
 Per share - basic                             $     0.14        $     0.23 
           - diluted                           $     0.13        $     0.22 

Net income ('000)                              $      720        $    1,279 
 Per share - basic                             $     0.02        $     0.04 
           - diluted                           $     0.02        $     0.04 

Capital expenditures, net ('000)               $   19,835        $   13,665 

                                                    As at             As at 
                                                 March 31,         March 31,
                                                     2011              2010 
----------------------------------------------------------------------------
Working capital (deficiency) including                                      
 bank debt and excluding                                                    
 commodity price contracts ('000)              $  (47,549)       $  (32,016)

Common shares outstanding                       32,774,18         30,557,24 
                                                        0                 3 
Options outstanding                             2,899,995         1,718,881 

OPERATIONS                                   Three months      Three months 
                                           ended March 31,   ended March 31,
                                                     2011              2010 
----------------------------------------------------------------------------
Average daily production                                                    
 Crude oil and natural gas liquids (bbls/d)         2,609             2,281 
 Natural gas (mcf/d)                                5,268             7,458 
 Barrels of oil equivalent (boe/d)                  3,487             3,524 

Average product prices                                                      
 Crude oil and natural gas liquids ($/bbl)     $    60.45        $    65.16 
 Natural gas ($/mcf)                           $     3.94        $     5.16 
 Total ($/boe)                                 $    51.18        $    53.09 

Field netback ($/boe) (1)                      $    20.03        $    26.44 
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Note (1) Funds from operations, funds from operations per share and field netback are not terms prescribed by IFRS or the previous Canadian generally accepted accounting principles (Canadian GAAP), so are considered non-GAAP measures. Funds from operations represents cash generated from operating activities before changes in non-cash working capital and asset retirement 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 GAAP measurements may not be comparable with the calculation of similar measures for other companies.

Note (2) Net income for the three months ended March 31, 2010 has been restated for the effect of adopting IFRS. Further information on the IFRS impacts is provided in the Change in Accounting Policies section of the MD&A and the unaudited condensed interim consolidated financial statements for the period ended March 31, 2011.

During the first quarter of 2011 Rock focused its operating activity on liquids rich natural gas reserve additions at Elmworth in West Central Alberta. The quarter was highlighted by the following:


--  Drilled 2 (1.5 net) successful natural gas wells including a 50% working
    interest Montney horizontal natural gas well at Elmworth and a 100%
    working interest well at Saxon; 
--  Successfully tested a 100% working interest Montney vertical natural gas
    well on our South Elmworth lands that confirmed the existence of Montney
    natural gas reserves in both the B and C zones: 
--  Drilled 11 (11.0 net) heavy oil wells with a 92% success rate of which
    10 (10.0 net) will be completed and on production by the end of the
    second quarter of 2011; 
--  The Company's net undeveloped land position increased by 6% to 97,217
    net acres; 
--  The inventory of heavy oil drilling locations in the Plains area was
    expanded to 190 locations from 170 locations as at December 31, 2010; 
--  Completed the acquisition of 250 barrels per day of 99% working interest
    heavy oil assets and the disposition of approximately 250 boe per day of
    low working interest non-operated natural gas production; 
--  Production averaged 3,487 boe per day (75% crude oil and natural gas
    liquids and 25% natural gas) which was impacted by a shutdown of the
    third party SemCAMS K3 plant which shut-in approximately 600 boe per day
    of the Company's production in March 2011; 
--  Spent $19.8 million (including acquisitions and net of dispositions) on
    an extensive capital expenditure program on first quarter initiatives;
    and 
--  Generated funds from operations for the quarter of $4.5 million
    ($0.14/share). 

Rock's daily production for the first quarter of 2011 averaged 3,487 boe per day as it was adversely affected by continued performance issues on a number of heavy oil wells and by the shutdown of the SemCAMS K3 plant in March. Normal operations at the SemCAMS K3 plant resumed in mid April 2011 but were shutdown again on May 5, 2011 for an initially anticipated timeframe of 7 to 10 days. Rock subsequently received notice from SemCAMS on May 10, 2011 that the shutdown could extend for an additional 4 to 8 weeks. As a result, production is currently estimated to be approximately 3,000 boe per day with approximately 600 boe per day of production shut-in associated with the K3 plant shut down.

Rock is planning a capital program for 2011 that includes drilling an additional 29 heavy oil wells in the Plains region and an additional five natural gas wells in the West Central Alberta core area. Rock expects daily production to reach 4,500 - 4,900 boe per day by year end with a product mix that is expected to be 73% crude oil and natural gas liquids.

Financially, Rock generated funds from operations of $4.5 million ($0.14 per basic share) in the first quarter of 2011 and net income of $0.7 million. Funds from operations for the quarter were adversely affected by lower production levels and higher operating costs.

Rock generated a field netback of $20.03 per boe in the first quarter of 2011 compared to $26.44 per boe in the first quarter of 2010. Field netbacks for 2011 were significantly impacted by a reduction in realized prices and increased operating costs. Rock's realized price in the first quarter of 2011 was $51.18 per boe compared to $53.09 per boe in the first quarter of 2010. The decrease in price realizations can be attributed to the decrease in natural gas prices as the increase in posted crude oil prices was offset by widening heavy oil differentials. Increased operating costs were due to a higher level of fuel usage and increased well servicing activity in our heavy oil operations. Operating costs per boe increased to $21.79 per boe in the first quarter of 2011 compared to $16.38 per boe in the first quarter of 2010. With anticipated increases in average production throughout 2011, fuel gas initiatives and anticipated reductions in workovers and product handling costs, operating costs per boe are expected to decrease to a range of approximately $19.00 per boe to $19.50 per boe by the fourth quarter of 2011.

Net capital expenditures for the first quarter of 2011 were $19.8 million (including acquisitions and net of dispositions) and total net debt at the end of the quarter was $47.5 million. Subsequent to March 31, 2011, Rock announced a $30 million bought deal financing of 4,000,000 common shares at an issue price of $5.00 per Common Share and 1,640,000 common shares to be issued on a "flow-through" basis at an issue price of $6.10 per Flow-Through Common Share. In addition, Rock announced that the Company's bank facility was expanded to $65 million from $50 million which will support an expanded capital program for 2011. The Company is in a strong financial position with a foundation of funds flow and excess debt capacity to execute our planned expanded 2011 capital program.

Rock's Board of Directors has approved an increase in the capital budget from $52 million to $77 million for 2011. The success of our liquids rich natural gas initiatives at Elmworth in West Central Alberta in 2010 and the first quarter of 2011 have exceeded our expectations and have confirmed the existence of deeper Montney natural gas reserves on our lands. Rock will continue defining our Elmworth natural gas resource play and is proceeding with an accelerated exploitation program including horizontal drilling using multistage fracturing techniques.

The expanded capital program for 2011 includes an acceleration of capital spending on the Company's Montney resource project at Elmworth. The Company plans to drill a 100% working interest horizontal well in North Elmworth, a 100% working interest horizontal well in South Elmworth, and three 100% vertical stratigraphic test wells in South Elmworth and incur initial expenditures for related pipeline and processing facilities.

Area Activity Update

To date in 2011, Rock has drilled 11 (11.0 net) heavy oil wells as part of a planned 40-well program for the year that is expected to provide growth in our 2011 crude oil production.

Rock completed the acquisition of 250 barrels per day of 99% working interest heavy oil assets in the Plains core area for $12.8 million. Rock has identified up to 10 drilling locations on these newly acquired lands and plans to initiate a waterflood project to increase the recovery factor on the acquired assets. Rock funded the majority of the heavy oil acquisition through the completed disposition of 250 boe per day of low working interest non-operated natural gas production in the Cutbank area for $10.5 million.

The Company has drilled 3 (2.5 net) successful natural gas wells to date, including a second 100 percent working interest Montney vertical test well (13-12-68-10W6M) at South Elmworth that was drilled and cased in April 2011. The test well encountered 23 metres of pay in the Montney B zone, 22 metres of pay in the Montney C zone and 6 metres of pay in the Halfway zone. The well will be completed and fracture stimulated subsequent to break-up and tested early in the third quarter of 2011. This well result has further confirmed the extension of Montney natural gas reserves (both B and C zones) on Rock's South Elmworth lands.

Executive Appointment

Rock is also pleased to announce the appointment of Greg Schmidt as Vice President Operations effective May 11, 2011, reporting to Jeffrey G. Campbell, Senior Vice-President and Chief Operating Officer. Greg will have the responsibility of leading the Company's operations team including drilling operations, field operations, facilities, safety and exploitation initiatives on Rock's strong portfolio of internally generated heavy oil and Deep Basin Montney natural gas opportunities. Initially, Greg's team will focus on heavy oil production optimization, operating cost improvements and the development of pipeline and processing facilities at Elmworth.

Outlook

With reduced first quarter production volumes and the unanticipated additional third party production disruptions in the second quarter, Rock is reducing its previously announced production and related cash flow guidance. Revised guidance now anticipates that average production will be between 3,800 and 4,200 boe per day in 2011 from previous estimates of between 4,000 and 4,400 boe per day while maintaining its previously announced guidance for exit production of 4,500 to 4,900 boe per day. Assuming the closing of the $30 million equity financing on May 19, 2011 and that crude oil prices average US $95.00 WTI per barrel for the remainder of 2011 and natural gas at AECO averages $4.00 CDN/mcf with an exchange rate of $1.03 CDN$/US$ the Company would generate cash flow of $30 million (or $0.82/share) and have year-end 2011 net debt of approximately $51 million.

To date this year, we have focussed on proving up the emerging resource play at Elmworth. During the second and third quarters of this year we will be building our heavy oil production base and cash flow. During the latter part of 2011, Rock intends to bring its liquids-rich natural gas projects at Elmworth on-stream under the first phase of its long-term development plan.

Rock has developed an inventory of approximately 190 heavy oil drilling opportunities and has assembled a large land position in the Elmworth area that is at the forefront of an emerging resource play that could significantly transform our company 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: 2011 average production; the Company's drilling plans; the reserve volumes associated with the assets acquired in the Plains area; Rock's estimate of net asset value per share; Rock's plans to initiate a waterflood project on the assets acquired in the Plains area to increase the recovery factor of this asset; Rock's drilling plans in the Plains area; and Rock's inventory of drilling locations.

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 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 & CFO
    (403) 218-4380
    www.rockenergy.ca