Rock Energy Inc.
TSX : RE

Rock Energy Inc.

August 09, 2011 21:16 ET

Rock Energy Reports Financial and Operating Results for the Second Quarter of 2011 and Initiates Strategic Alternatives to Maximize Shareholder Value

CALGARY, ALBERTA--(Marketwire - Aug. 9, 2011) - Rock Energy Inc. (TSX:RE) ("Rock") announces its financial and operational results for the three and six months ended June 30, 2011. Rock has filed its unaudited condensed interim Consolidated Financial Statements for the period ended June 30, 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 and six months ended June 30, 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.

CORPORATE SUMMARY


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                                               Three        Six         Six 
                           Three Months       Months     Months      Months 
                                  Ended        Ended      Ended       Ended 
                               June 30,     June 30,   June 30,    June 30, 
                                   2011         2010       2011      2010(2)
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Crude oil and natural gas                                                   
 revenue ('000)            $     17,199  $    15,285 $   33,261  $   32,125 

Funds from operations                                                       
 ('000)(1)                 $      4,016  $     6,283 $    8,468  $   13,246 
 Per share - basic         $       0.11  $      0.21 $     0.25  $     0.43 
 - diluted                 $       0.11  $      0.20 $     0.24  $     0.42 

Net income (loss) ('000)   $     (3,106) $       850 $   (2,386) $    2,129 
 Per share - basic         $      (0.09) $      0.03 $    (0.07) $    (0.02)
 - diluted                 $      (0.09) $      0.03 $    (0.07) $    (0.02)

Capital expenditures, net                                                   
 ('000)                    $      9,465  $     7,188 $   29,300  $   20,853 
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                                  As at        As at                        
                               June 30,     June 30,                        
                                   2011         2010                        
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Working capital deficiency                                                  
 including bank debt and                                                    
 excluding commodity price                                                  
 contracts ('000)          $     23,188  $    33,230                        

Common shares outstanding    38,727,981   30,808,928                        
Options outstanding           2,804,528    2,010,128                        

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                                  Three        Three        Six         Six 
                                 Months       Months     Months      Months 
OPERATIONS                   Ended June   Ended June Ended June  Ended June 
                               30, 2011     30, 2010   30, 2011    30, 2010 
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Average daily production                                                    
 Crude oil and natural gas                                                  
  liquids (bbls/d)                2,296        2,418      2,452       2,350 
 Natural gas (mcf/d)              5,126        7,813      5,196       7,637 
 Total (boe/d)                    3,150        3,720      3,318       3,623 

Average product prices                                                      
 Crude oil and natural gas                                                  
  liquids (Cdn$/bbl)       $      73.12  $     56.23 $    66.40  $    60.54 
 Natural gas (Cdn $/mcf)   $       4.12  $      4.10 $     4.03  $     4.61 
 Combined (Cdn$/boe)       $      59.99  $     45.15 $    55.38  $    48.99 

Field netback                                                               
 (Cdn$/boe)(1)             $      21.37  $     23.17 $    20.66  $    24.87 
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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 abandonment 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 (loss) for the three and six months ended June 30, 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 this MD&A.

With spring break-up and poor weather conditions during the second quarter of 2011, Rock had limited operating activity on its liquids rich natural gas reserve initiatives at Elmworth in West Central Alberta or on its heavy oil operations in the Plains core area. The quarter was highlighted by the following:


--  Drilled a 100% working interest Montney vertical natural gas well on our
    South Elmworth lands that, through logs, further confirmed the existence
    of Montney natural gas reserves indicating 23 metres of pay in the
    Montney B zone and 22 metres of pay in the Montney C zone; 
--  Drilled one (1.0 net) heavy oil well in the second quarter of 2011; 
--  Commissioned a natural gas resource study at Elmworth by GLJ Petroleum
    Consultants Ltd. (GLJ), the Company's external petroleum engineering
    Consultants;
--  Increased the Company's net undeveloped land position increased by 20%
    to 116,790 net acres; 
--  Production averaged 3,150 boe per day (73% crude oil and natural gas
    liquids and 27% natural gas) which was impacted by shutdowns of third
    party natural gas plants and from unusually wet weather conditions. Rock
    currently has approximately 550 boe per day of production behind pipe
    that is expected to come on-stream by the end of September 2011; 
--  Spent $9.5 million on the capital expenditure program; and 
--  Generated funds from operations for the quarter of $4.0 million
    ($0.11/basic share). 

Rock's daily production for the first half of 2011 averaged 3,318 boe per day as it was adversely affected by continued performance issues on a number of heavy oil wells, by the shutdown of the SemCAMS K3 plant in March, April and May 2011 and from the loss of production from a Saxon well in the second quarter of 2011 that was drilled in the first quarter of 2011. Normal operations at the SemCAMS K3 plant resumed in late May 2011 with no further major disruptions experienced since that time. Production is currently estimated to be approximately 3,200 boe per day including approximately 2,200 barrels per day of heavy oil production. Rock currently has approximately 550 boe per day of production behind pipe (150 barrels per day of heavy oil being completed and equipped and 400 boe per day of gas at Elmworth being tied in) that is expected to come on-stream by the end of September 2011.

Financially, Rock generated funds from operations of $4.0 million ($0.11 per basic share) in the second quarter of 2011. Funds from operations for the second quarter were adversely affected by lower production levels and higher operating costs.

Rock's realized price in the second quarter of 2011 was $59.99 per boe compared to $45.15 per boe in the second quarter of 2010 primarily attributable to increased crude oil prices. Rock generated a field netback of $21.36 per boe in the second quarter of 2011 compared to $23.17 per boe in the second quarter of 2010. Field netbacks for 2011 were impacted by increased operating costs as heavy oil operating costs increased to $32.75 per barrel in the second quarter of 2011 compared to $21.31 per barrel in the second quarter of 2010. The increase in heavy oil operating costs was due to well servicing activity, increased crude oil and water handling costs and higher than anticipated fuel costs. Total corporate operating costs per boe increased to $26.37 per boe in the second quarter of 2011 compared to $16.91 per boe in the second quarter of 2010.

Net capital expenditures for the second quarter of 2011 were $9.5 million and total net debt at the end of the quarter was $23.2 million against total bank credit lines of $65.0 million. On May 19, 2011, Rock closed a $30 million bought deal financing of 4,238,100 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.

Area Activity Update

To date in 2011, Rock has drilled 20 (20.0 net) heavy oil wells with an 85% success rate. The Company will be bringing these wells on-stream by the end of September, 2011. In addition, the Company has drilled 3 (2.5 net) natural gas wells to date in 2011, 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. This well has further confirmed the extension of Montney natural gas reserves (both B and C zones) on Rock's South Elmworth lands.

In addition to recent drilling activity at Elmworth, Rock anticipates that its first North Elmworth 50 percent working interest Montney horizontal well (13-7-71-9W6M), drilled in the first quarter of 2011 that tested for three days at a final production rate of 7.7 mmcf per day plus more than 50 bbls of natural gas liquids per mmcf of natural gas, will be tied -in and on-stream in September 2011 at an expected rate of 2 mmcf per day plus liquids.

Rock's 100 percent working interest Montney vertical test well (6-6-69-9W6M) at South Elmworth was cased in December 2010 and encountered natural gas in the Halfway, Montney C and Montney B zones. The well encountered 29 metres of Montney B and 28 metres of Montney C pay. Both the Montney B and Montney C zones were completed, fracture-stimulated and each zone tested for three days at initial production rates of 2.5 mmcf per day and a final rate of 0.6 mmcf per day at a flowing tubing pressure of 230 psi. This formation also produced approximately 25 bbls of natural gas liquids per mmcf. In June 2011, the up- hole Halfway zone in this well was completed, fracture-stimulated and the Halfway zone is expected to be tied-in and on production in September 2011, at an expected rate of 2 mmcf per day.

Rock is also incurring initial expenditures for the North Elmworth pipeline and processing facilities and is pursuing alternatives with third party natural gas processors to outline a plan to establish appropriate infrastructure for significant new liquids rich natural gas production from the emerging resource play at Elmworth to be on stream by the end of 2012.

Future plans on the Company's Montney resource project at Elmworth includes drilling a 100% working interest horizontal well in South Elmworth and a 100% working interest horizontal well in North Elmworth and up to three 100% vertical stratigraphic test wells in South Elmworth.

In July 2011, based on the success of Rock's initiatives at North Elmworth in 2010 and the first quarter of 2011, the Company was successful in adding 5 (5.0 net) sections to the existing 8 (6.0 net) sections of Montney lands in North Elmworth for a total of 13 (11.0 net) sections. Combined with the Company's undeveloped land position in South Elmworth, Rock has 70.5 (68.5 net) sections of Montney undeveloped land in its' Elmworth core area.

Finally, Rock commissioned GLJ Petroleum Consultants Ltd. (GLJ), the Company's external petroleum engineering consultants, to conduct a Montney natural gas study for a portion of its Elmworth area. Rock will be issuing a separate press release in the next few weeks with the results of this study.

Rock Initiates Plan to Consider Strategic Alternatives to Maximize Shareholder Value

Rock has made significant progress at Elmworth to establish a strong land base, delineate the resource potential, prove up the commerciality of the liquids rich natural gas play and identify a number of viable natural gas handling alternatives to produce the resource. In addition to Rock's successful Elmworth initiatives, several larger scale industry peers are experiencing success on their activities at Elmworth and are accelerating their capital spending plans in the area accordingly. As a significant amount of capital and related infrastructure at Elmworth is required by Rock to maximize value in the area, Rock's Board of Directors has established a special committee to pursue strategic alternatives in order to maximize value for our shareholders. A financial advisor to the Company is expected to be engaged by the Special Committee of the Board of Directors by the end of August 2011.

Outlook

In order to preserve a solid long term financial position for the Company, Rock's Board of Directors has approved a decrease in the capital budget for 2011 from $77 million to approximately $42 million. With reduced cash flow from operations and decreased capital spending,Rock anticipates that its previously announced average production and cash flow guidance for the year will not be achieved. Given the uncertainty of the nature and timing of the possible strategic alternatives, Rock will not provide updated guidance for the year at this time.

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.

For further information please visit our website at www.rockenergy.ca.

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