Turnkey E&P Inc.
TSX : TKY

Turnkey E&P Inc.

March 25, 2008 19:34 ET

Turnkey E&P Inc. Announces Fourth Quarter and Full Year 2007 Results

CALGARY, ALBERTA--(Marketwire - March 25, 2008) - Turnkey E&P Inc. ("Turnkey") (TSX:TKY), today announced its financial and operating results for the three and twelve months ended December 31, 2007.

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



Selected Consolidated Financial Information

Three Months Twelve Months
Ended Ended
December 31, December 31,
----------------- -----------------
2007 2006 2007 2006
$ $ $ $
------- ------- ------- -------

Financial Results
Revenue 5,901 2,791 17,744 19,135
Operating expenses 3,546 3,692 14,689 18,858
Income taxes 2,573 (4) 2,594 -
Net loss (2,982) (3,677) (5,800) (5,352)
Loss per share - basic and diluted (0.12) (0.15) (0.24) (0.22)

December 31, December 31,
2007 2006
$ $
------------ ------------
Financial Position
Cash and cash equivalents 20,959 47,519
Working capital 20,201 46,462
Long-term debt 187 Nil
Shareholders' equity 88,993 93,623


Operating and Financial Highlights

Turnkey reported a net loss of $2,982 for the quarter ending December 31, 2007 and $5,800 for the year ending the same date, as compared to a net loss of $3,677 for the same quarter in 2006 and $5,352 for the year ended December 31, 2006. The net loss for the quarter and year ending December 31, 2007 included a $2,466 charge to income tax expense attributable to the write-off of a future income tax asset.

The Corporation uses its drilling rigs to drill on its own oil and natural gas properties as well as providing contract drilling services to third-party customers. Revenues from drilling on Corporation-owned properties are eliminated in the consolidated financial statements.

Turnkey's drilling rig utilization in the fourth quarter of 2007 was 87% comprised of 196 days drilling for third-party customers and 123 days drilling on its own properties. During the entire year of 2007, Turnkey's drilling rig utilization rate was 66% comprised of 620 days drilling for third-party customers and 340 days drilling on its own properties. The drilling rig utilization rate for the fourth quarter and entire year of 2006 was 40% and 60%, respectively. Turnkey drilled five wells on Corporation-owned property in the Clear Creek Field. Production from the Clear Creek Field commenced in the fourth quarter of 2007. During the fourth quarter of 2007, the Corporation sold an average of 130 barrels of oil equivalent per day. The Corporation had proved reserves of approximately 1.2 million barrels of oil equivalent at December 31, 2007, more than a 300% increase from the proved reserves at December 31, 2006. Full details of the Corporation's reserves are set out in its Annual Information Form, which has been filed on www.sedar.com.



Below are the Corporation's summarized financial statements:

Summary Balance Sheet

December 31, December 31,
2007 2006
$ $
------------- -------------
Assets

Current assets
Cash and cash equivalents 20,959 47,519
Accounts receivable 3,580 3,738
Prepaid expenses 1,351 344
------------- -------------

25,890 51,601

Property and equipment 65,940 40,501

Future income tax asset - 2,582

Preferred supplier agreement and other 3,039 4,078
------------- -------------

94,869 98,762
------------- -------------
------------- -------------

Liabilities and Shareholders' Equity

Current liabilities
Accounts payable and accrued liabilities 5,689 5,110
Income and other taxes payable - 29
------------- -------------

5,689 5,139
------------- -------------

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

Shareholders' equity

Share capital 97,950 97,659

Share purchase warrants - 1,000

Contributed surplus 2,699 820

Deficit (11,656) (5,856)
------------- -------------

88,993 93,623
------------- -------------

94,869 98,762
------------- -------------
------------- -------------


Summary Income Statement
December 31, December 31,
2007 2006
$ $
------------- -------------

Revenue 17,744 19,135
------------- -------------

Expenses
Operating 14,689 18,858
General and administration 3,985 4,814
Depreciation and amortization 3,465 2,689
Stock-based compensation 959 770
Other income (2,148) (2,644)
------------- -------------

20,950 24,487
------------- -------------

Loss before income taxes (3,206) (5,352)
------------- -------------

Income taxes
Current 128 -
Future income taxes 2,466 -
------------- -------------

2,594 -
------------- -------------

Net loss and comprehensive loss for the
year (5,800) (5,352)

Deficit - Beginning of year (5,856) (504)

Deficit - End of year (11,656) (5,856)
------------- -------------

Net loss per share
Basic and diluted (0.24) (0.22)
------------- -------------

Weighted average number of common shares
Basic 24,149,298 24,144,575
Diluted 24,299,536 24,331,681


Summary Cash Flows
December 31, December 31,
2007 2006
$ $
------------- -------------

Cash provided by (used in)

Operating activities
Net loss for the year (5,800) (5,352)
Items not involving cash
Depreciation and amortization 3,465 2,689
Stock-based compensation 959 770
Future income tax reduction 2,582 -
Accretion expense 7 -
Foreign exchange gains (354) (45)
------------- -------------
859 (1,938)

Changes in non-cash working capital
Accounts receivable 158 (2,387)
Prepaid expenses (1,007) 947
Accounts payable and accrued liabilities (1,717) 2,440
Income and other taxes payable (29) (134)
------------- -------------

Net cash provided by (used in) Operating
Activities (1,736) (1,072)
------------- -------------

Financing activities
Issue of common shares 211 -
Change in accounts payable - (376)
------------- -------------

Net cash provided by (used in) Financing
Activities 211 (376)
------------- -------------
Investing activities
Purchase of property and equipment (27,721) (11,142)
Other 36 149
Changes in accounts payable 2,296 1,324
------------- -------------

Net cash provided by (used in) Investing
Activities (25,389) (9,669)
------------- -------------

Effect of foreign exchange gains on cash 354 45

Decrease in cash and cash equivalents (26,560) (11,072)

Cash and cash equivalents
- Beginning of year 47,519 58,591
------------- -------------

Cash and cash equivalents
- End of year 20,959 47,519
------------- -------------

Supplemental information
Interest paid - -
Income taxes paid 125 134


Casing Drilling® Services

During the last half of 2007, Casing Drilling® services enjoyed a significant improvement in its activity level. The utilization rate rose from 52% in the first 6 months to 79% in the last 6 months. Casing Drilling® services generated positive cash flow and drilled 8 wells under turnkey contracts compared to none in 2006. The cash margins for turnkey contracts were, on average, 85% greater than the cash margins for daywork contracts. The rigs are currently employed under three different contractual arrangements. First is conventional dayrate contract where very little risk is assumed by the Corporation and the profit margin is fixed. Second is turnkey drilling contract where Turnkey does not participate in the E&P project, but elects to assume the drilling risk for the opportunity to earn a higher profit margin than on dayrate contracts. The third contract arrangement is the same as the second one except the Corporation's exploration and production segment also invests in the oil and gas project. Currently there is an abundance of low to medium risk geological plays with medium to high risk drilling problems where the owners are seeking partners to participate in the drilling. The Corporation is aggressively pursuing these opportunities because they provide Turnkey the greatest upside since the Casing Drilling® technology mitigates the high drilling risk and the E&P risk is low. The Corporation's oil and gas segment will only participate in those E&P projects whereby the operator agrees to hire Turnkey to drill the well under a turnkey contract. Currently three of the Corporation's four rigs are active, two drilling under turnkey contracts and one drilling under a dayrate contract.

Turnkey continues to develop the pump-in/reverse-out (PIRO) method of running and retrieving Casing Drilling® downhole tools. The current method developed by Tesco uses wireline to run and retrieve the tools. Although successful with this method, it requires more time and has higher capital and maintenance costs. Turnkey successfully implemented PIRO during the latter part of 2007 and continues to refine the technique, even on wells where loss circulation is a problem. The Corporation expects to have the PIRO process fully developed by the third quarter of this year and expects drilling costs to be further reduced due to the simplicity of the tools and the speed at which bottom hole assemblies can be tripped.

Oil and Gas

Clear Creek Field, Louisiana

To date, the Corporation has drilled five wells in this field. Two of the wells were producing approximately 140 barrels of oil per day and 250 mcf of gas per day (gross) at December 31, 2007. Another two of the wells were being completed and equipped for oil production at year end. The other well was a dry hole and is temporarily abandoned pending the acquisition of seismic data, which may lead to deepening of this well and the other four wells to test the Wilcox formation. Further drilling will be suspended until more production history and seismic data can be obtained and evaluated for deeper Wilcox opportunities. In addition, the Corporation plans to initiate a waterflood study to evaluate the feasibility of recovering the estimated 14 million barrels of recoverable reserves still left in the "A" sand. This study should be substantially completed in the fourth quarter of 2008.

Hurricane Creek, Louisiana

The Corporation drilled its first well in the Hurricane Creek field during 2007. The well is currently being completed as an oil well and initial production is expected to commence in March 2008. Although the well has yielded positive results, the Corporation intends to produce this well for several months prior to drilling any other wells in the field.

Magnolia City, South Texas

The Corporation leased this 1,250 acre tract in South Texas during 2007. Three proved undeveloped well locations exist on the acreage. The Corporation plans to workover two shut-in wells that were drilled by the former lessee of this property during the second quarter 2008 and intends to drill two more wells in 2008. Additional, untapped zones exist below the proved reservoirs in the deeper Vicksburg. The Corporation expects to obtain a partner to share in the cost of drilling and developing this acreage.

Loma Vieja Field, South Texas

The Corporation acquired a 1,250 acre lease in the Loma Vieja field that has produced over 40 billion cubic feet to date during 2007. A substantial portion of the cumulative production has come from the "R" sand where there is an estimated 15 billion cubic feet remaining to recover. Below the "R" sand is a series of high pressure "T" sands that have been drilled and mapped to contain an addition 80 billion cubic feet, but production has been minimal due to the high extent of formation damage caused by the conventional over-balanced drilling process. The Corporation plans to Casing Drill® an under-balanced well in 2008 which should eliminate formation damage and enable the "T" sands to produce. This well will also be used to produce the "R" sand gas. The Corporation expects to obtain a partner to share in the cost of drilling and developing this acreage.

Other South Texas Prospects

Beginning in January 2008, the Corporation began negotiating for new leases in South Texas covering over 13,000 acres where Casing Drilling® has shown to add value to the drilling process. The Corporation expects to finalize these transactions by midyear 2008. This acreage is in the middle of the Lobo and Frio/Vicksburg trends and the Corporation intends to obtain a partner to further evaluate and develop this acreage.

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

The Corporation has also filed an Annual Information Form for the year ended December 31, 2007, which includes the following reports required under National Instrument 51-101 "Standard Disclosure for Oil and Gas Activities": Form 51-101F1, Statement of Reserves Data and Other Oil and Gas Information; Form 51-101F2, Reports of Reserve Data by Independent Qualified Reserves Evaluators; and Form 51-101F3, Report of Management and Directors on Oil and Gas Disclosure. The Annual Information Form is also 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