Turnkey E&P Inc.
TSX : TKY

Turnkey E&P Inc.

May 15, 2008 19:10 ET

Turnkey E&P Inc. Announces First Quarter 2008 Results

CALGARY, ALBERTA--(Marketwire - May 15, 2008) - Turnkey E&P Inc. ("Turnkey") (TSX:TKY), today announced its financial and operating results for the three months ended March 31, 2008.

The figures presented below are expressed in thousands of U.S. dollars, except where otherwise stated.




Selected Consolidated Financial Information

Three Months
Ended
March 31,
--------------------------
2008 2007
$ $
----------- -------------
Financial Results
Revenue 8,812 1,468
Operating expenses 6,989 1,977
Income taxes (116) (594)
Net loss (1,065) (1,513)
Loss per share - basic and diluted (0.04) (0.06)


March 31, December 31,
2008 2007
$ $
----------- -------------
Financial Position
Cash and cash equivalents 11,705 20,959
Working capital 12,583 20,201
Long-term debt 191 187
Shareholders' equity 88,292 88,993


Operating and Financial Highlights

Turnkey reported a net loss of $1,065 for the quarter ending March 31, 2008 as compared to a net loss of $1,513 for the same quarter in 2007.

Casing Drilling® Services

Turnkey's drilling services business model is to use Casing Drilling® technology to mitigate the risk normally associated with conventional drillpipe drilling when drilling difficult wells for a lump sum amount (turnkey contract) where higher profit margins can be expected.

During the first quarter, the Corporation's four Casing Drilling® rigs operated at a 69% utilization rate drilling four wells under dayrate contracts and five wells under turnkey contracts. Rig efficiency continues to improve as the PIRO (pump-in/reverse out) bottom hole tool conveyance technology supplements the wireline conveyance process. The Corporation successfully reversed out tools through the inside of the casing in a well control situation where it was unsafe to trip pipe. If this well had been drilled with conventional drillpipe, the drillpipe would have had to been cemented in the hole and the well lost. In another incident, the casing drilled through the pay zone and then became stuck. The tools were successfully reversed out from a record depth of 11,640 feet and the well was completed. Again, in this situation, stuck conventional drillpipe would have had to been fished out before the well could be completed. These two achievements with the PIRO system have given Turnkey the confidence to enter into turnkey contracts in areas where conventional drillpipe operations are risky. Casing Drilling® continues to mitigate these risks and offers the opportunity for much higher margins. Small to medium sized operating companies are recognizing the value of Casing Drilling® under a turnkey contract where they do not have to take the drilling risk. Currently the Corporation has four third-party wells to drill under turnkey contracts and numerous turnkey bids outstanding. The positive cash flow being generated by the rigs during the last two quarters prove the model is viable. We expect to start generating positive earnings from the drilling division as we grow this market.

Oil and Gas

Turnkey's E&P business model is to use Casing Drilling® technology to access reserves that are difficult to drill or experience formation damage as a result of conventional drillpipe drilling methods. The Corporation employs two strategies to generate drilling prospects. The first strategy involves the acquisition of acreage directly from mineral owners and, in many cases, the resale of a portion of the acreage to a third party to assist with the exploitation and development of the property. Under the second strategy, the Corporation agrees to drill wells for third parties under a turnkey contract and also participates as a working interest owner in the prospect (referred to as "Participation Wells"). Both of these strategies require that Turnkey be the drilling contractor.

Clear Creek Field, Louisiana

The Corporation has drilled a total of 5 wells on its 5,600 acres of leasehold in the Clear Creek field of which two are producing approximately 100 BOPD and 170 MCFPD. With respect to the other three wells, one has been temporarily abandoned pending the acquisition of seismic which may lead to deepening to test the Wilcox formation. Turnkey recently re-squeezed a potential zone with cement in the second well and installed a pump. The well is currently being swab tested. The third well has been suspended for nine months and will be re-completed within the second quarter using the knowledge gained from re-evaluating the logs of the Cockfield sands. The field has an estimated 14 million barrels of recoverable oil reserves in the "A" sand. The Corporation has initiated a secondary recovery study to more accurately estimate the reserves and determine the best methods to recover this oil. The study is also expected to assist in the ongoing effort to obtain a partner to participate in this project.

Hurricane Creek, Louisiana

During the first quarter, Turnkey finished drilling its first well on the 2,800 acres it controls in this field. The McPherson #1 was drilled to approximately 9,000 feet and encountered multiple zones. One of the zones (Doornbos) had an estimated original 60 million barrels of oil in place throughout the field and has only produced approximately 2 million barrels to date. This zone has recently been completed and the initial production rate is in excess of 50 BOPD on pump. An offset well is currently being planned.

Magnolia City, South Texas

During the first quarter, the Corporation moved a rig onto a suspended well that was acquired when it obtained a lease on a 1,250 acre tract in the Magnolia City field in 2007. The well experienced mechanical problems while preparing to test 10 potential zones. The wellbore will be sidetracked at 4,000 feet and drilled to a total depth of 6,000 feet to retest the zones that the Corporation believes are productive. Based on the success of these tests, the Corporation will proceed to drill two development wells on the acreage during the remainder of the year. There is potential for up to 8 wells on the Magnolia City leases with expected producible reserves of 1.5 BCF per wellbore. This acreage is near the Stratton field where Casing Drilling® was very successful in unlocking substantial reserves that could not be recovered with conventional drillpipe drilling due to drilling fluid losses causing formation damage. The Corporation expects the Casing Drilling® process to mitigate the problems previously associated with drilling a wellbore that has pressured zones interbedded with depleted zones. First production is anticipated by the end of the second quarter.

Loma Vieja Field, South Texas

The Corporation leased 1,250 acres in the Loma Vieja field in 2007 where a total of over 35 BCF has been produced to date. A substantial portion of these reserves were produced from the "R" sand but it is calculated that 15 BCF is left to be recovered. A review of 3D seismic determined that the "S" sand just below the "R" sand has an estimated 16 BCF of gas remaining to be recovered. The seismic also confirmed that the lower series of "T" sands contain an estimated 80 BCF, but production has been limited to about 8 BCF due to the high extent of formation damage caused by the conventional over-balanced drilling process. The Corporation expects to acquire an additional 1,300 acres adjacent to the Loma Vieja field that covers the extension of the "T" sands during the second quarter. Plans to drill the "R" sand development location with the "S" and "T" series sands as additional potential are being finalized now. The well will be drilled using Casing Drilling® technology coupled with under-balanced drilling technology through the "S" and "T" sands to avoid formation damage. The Corporation will bring in a partner to further evaluate, develop and possibly operate this acreage. Turnkey plans to spud this well during the third quarter.

Other South Texas Acreage

During the first quarter, the Corporation acquired additional leases on 6,142 acres in South Texas. Turnkey is seeking partners to exploit this prime acreage.

Participation Wells

Turnkey successfully drilled its second Participation Well during the first quarter, the Forestar #1. In addition to drilling the well under a turnkey contract, the Corporation participated in the project with a 47% working interest. Logs have indicated several prospective zones which are currently being tested.

The Corporation's first Participation Well, the Bourque #1, was successfully drilled in the fourth quarter 2007. Turnkey participated with a 10% working interest. The operator is currently testing two prospective zones.

Below are the Corporation's summarized financial statements:



Summary Consolidated Balance Sheet

March 31, December 31,
2008 2007
$ $
----------- -------------
----------- -------------
Assets

Current assets
Cash and cash equivalents 11,705 20,959
Accounts receivable 8,301 3,580
Prepaid expenses 1,746 1,351
----------- -------------

21,752 25,890

Property and equipment 73,114 65,940

Preferred Supplier Agreement and other 2,786 3,039
----------- -------------

97,652 94,869
----------- -------------
----------- -------------

Liabilities and Shareholders' Equity

Current liabilities
Accounts payable and accrued liabilities 9,169 5,689
----------- -------------

Asset retirement obligations 191 187
----------- -------------

Shareholders' equity

Share capital 97,950 97,950

Contributed surplus 3,063 2,699

Deficit (12,721) (11,656)
----------- -------------

88,292 88,993
----------- -------------

97,652 94,869
----------- -------------
----------- -------------


Summary Consolidated Statement of Comprehensive Loss and Deficit

March 31, March 31,
2008 2007
$ $
----------- -------------
----------- -------------
Revenue
Drilling services 7,555 1,419
Oil and gas 1,257 49
----------- -------------

8,812 1,468
----------- -------------

Expenses
Operating - drilling services 6,389 1,963
Operating - oil and gas 600 14
General and administration 1,270 902
Depreciation and amortization 1,370 475
Stock-based compensation 364 221
Other income (116) (594)
----------- -------------

9,877 2,981
----------- -------------

Loss before income taxes (1,065) (1,513)
----------- -------------

Income taxes
Current - -
Future income taxes - -
----------- -------------
- -
----------- -------------
Net loss and comprehensive loss for the period (1,065) (1,513)

Deficit - Beginning of period (11,656) (5,856)
----------- -------------

Deficit - End of period (12,721) (7,369)
----------- -------------

Net loss per share
Basic and diluted (0.04) (0.06)
----------- -------------

Weighted average number of common shares
Basic 24,187,910 24,144,575
Diluted 24,187,910 24,307,786


Summary Consolidated Statement of Cash Flows

March 31, March 31,
2008 2007
$ $
----------- -------------
----------- -------------

Cash provided by (used in)

Operating activities
Net loss for the year (1,065) (1,513)
Items not involving cash
Depreciation and amortization 1,370 475
Stock-based compensation 364 221
Accretion expense 4 -
Foreign exchange (gains)/losses 36 (20)
----------- -------------
709 (837)

Changes in non-cash working capital
Accounts receivable (4,721) 1,581
Prepaid expenses (395) (130)
Accounts payable and accrued liabilities 3119 (969)
Income and other taxes payable - (29)
----------- -------------

Net cash provided by (used in) Operating
Activities (1,288) (384)
----------- -------------

Financing activities
Issue of common shares - -
Change in accounts payable - -
----------- -------------

Net cash provided by (used in) Financing
Activities - -
----------- -------------

Investing activities
Purchase of property and equipment (8,298) (4,782)
Other 7 7
Changes in accounts payable 361 230
----------- -------------

Net cash provided by (used in) Investing
Activities (7,930) (4,545)
----------- -------------

Effect of foreign exchange gains on cash (36) 20

Decrease in cash and cash equivalents (9,254) (4,909)

Cash and cash equivalents
- Beginning of period 20,959 47,519
----------- -------------

Cash and cash equivalents
- End of period 11,705 42,610
----------- -------------


The Corporation's Financial Statements and Management's Discussion and Analysis are posted on www.sedar.com

This release and Turnkey's website referenced in this release contain forward-looking statements including expectations of future production and components of cash flow and earnings. Investors are cautioned that assumptions used in the preparation of such information may prove to be incorrect. Events or circumstances may cause actual results to differ materially from those predicted, a result of numerous known and unknown risks, uncertainties, and other factors, many of which are beyond the control of Turnkey. These risks include, but are not limited to; the risks associated with the oil and gas industry, commodity prices and exchange rate changes. Industry related risks could include, but are not limited to; operational risks in exploration, development and production, delays or changes in plans, risks associated to the uncertainty of reserve estimates, health and safety risks including, without limitation, blowouts and spills, and the uncertainty of estimates and projections of production, costs and expenses. The risks outlined above should not be construed as exhaustive. Investors are cautioned not to place undue reliance on any forward-looking information. Turnkey undertakes no obligation to update or revise any forward-looking statements.

Casing Drilling® is a registered trademark of Tesco Corporation

Contact Information

  • Turnkey E&P Inc.
    R. M. (Bob) Tessari
    President and Chief Executive Officer
    (281) 248-8822