Turnkey E&P Inc.
TSX : TKY

Turnkey E&P Inc.

August 14, 2008 19:27 ET

Turnkey E&P Inc. Announces Second Quarter 2008 Results

CALGARY, ALBERTA--(Marketwire - Aug. 14, 2008) - Turnkey E&P Inc. ("Turnkey") (TSX:TKY), today announced its financial and operating results for the three and six months ended June 30, 2008.

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



Selected Consolidated Financial Information

Three Months Six Months
Ended Ended
June 30, June 30,
---------------------------------------------------------
2008 2007 2008 2007
$ $ $ $
------- ------- -------- -------

Financial Results
Revenue 4,958 5,107 13,770 6,575
Operating expenses 9,333 5,982 19,210 8,963
Income taxes (13) 21 (13) 21
Net loss (4,362) (896) (5,427) (2,409)
Loss per share -
basic and diluted (0.18) (0.04) (0.22) (0.10)


June 30, December 31,
2008 2007
$ $
-------- --------
Financial Position
Cash and cash equivalents
(including restricted cash) 18,181 20,959
Working capital 11,803 20,201
Long-term debt 9,100 187
Shareholders' equity 84,271 88,993


Operating and Financial Highlights

Turnkey reported a net loss of $4,362 for the quarter ending June 30, 2008 as compared to a net loss of $896 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 second quarter, the Corporation's four Casing Drilling® rigs operated at a 54% utilization rate. One well was drilled and completed under a daywork contract, three wells were drilled and completed under turnkey contracts, and one Corporation 100% owned well was reentered and sidetracked.

In addition, two turnkey contract wells were spudded but not completed during the quarter. The Corporation was a working interest participant in both of these wells. During the drilling of one of these wells, mechanical difficulties with the wireline running tools resulted in the bottom hole assembly being lost in the hole. As a result, the well had to be sidetracked to reach the total depth required by the turnkey contract. The well was declared a dry hole during August 2008. The Corporation owned a 32% before casing point working interest. The company incurred a substantial loss on the contract. The other well, which the Corporation owns a 10% before casing point working interest, was spudded in mid-June and is currently near the total depth required to be drilled per the drilling contract. Drilling operating costs for the second quarter include $3,000 that has been incurred to drill these two wells. As generally accepted accounting principles preclude the recognition of revenue on turnkey contracts until the contractual drilling depth has been reached, no corresponding revenue is included in drilling revenue for the quarter.

The Corporation reverted to using wireline running tools during the quarter so that revisions could be made to the new pump-in/reverse-out (PIRO) tools. These revisions are now complete and the new PIRO design is currently being used. The Genesis rig that had spent 6 years drilling under daywork contract for an operator in South Texas was shut down during the quarter for an overhaul and recertification. Drilling operating costs for the second quarter include $569 of costs that were incurred for this overhaul.

Three drilling rigs are currently drilling wells under turnkey contracts and the other rig is being moved to drill the second well in the Corporation's 100% working interest Hurricane Creek Field.

Oil and Gas

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. Two of these wells are currently producing approximately 100 barrels of oil per day and 170 thousand cubic feet of gas per day. The Corporation reentered a well that had been drilled and abandoned by another operator during the quarter. An electrical submersible pump has been installed in this well to determine if commercial quantities of oil can be produced. If this operation is successful, two of the nonproducing wells previously drilled by the Corporation will be completed and equipped in the same manner. The Corporation has also commissioned a third party to complete a secondary recovery study that is currently underway.

Hurricane Creek, Louisiana

During the first quarter of 2008, Turnkey completed the drilling of 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 pay zones. One of the zones (Doornbos), which had an estimated original 60 million barrels of oil in place throughout the field and has only produced approximately 2.6 million barrels to date, was completed and equipped with a gas lift mechanism. The current production rate is approximately 200 barrels of oil per day with only a trace of water and 50 thousand cubic feet of gas per day.

The Corporation believes that drilling the well with casing and completing the well in an underbalanced stimulated environment minimized formation damage and contributed to the excellent results. The Corporation intends to immediately directionally drill another well from the same surface location at a high angle through this laminated reservoir. If this technique yields the desired results, the company plans to directionally drill up to ten additional wells from this same surface location. Up to three more multi-well pads would be required to fully exploit the field.

Magnolia City, South Texas

The Corporation reentered the Genesis #1 in the Magnolia City Field during the second quarter. As a result of mechanical difficulties that were encountered, the well had to be sidetracked to test several prospective sands. The test confirmed the presence of hydrocarbons, but none of the sands were capable of producing at commercial rates. A second reentry is scheduled for mid-August which the Corporation expects to establish commercial production from the field. The Corporation owns a 100% working interest in 2,500 acres within the field.

Participation Wells

The Corporation expects to spud the Vieman #1 well on the Danbury Dome leases in South Texas in mid-August 2008. The Corporation believes this prospect is a low-risk attic prospect that has possible reserves estimated at 28 billion cubic feet. The well is located up dip from the Humble Vieman #1 well that tested 85 million cubic feet per day and watered out in 1965. The target formation is defined by 3-D seismic data and is expected to be encountered at depths between 13,000 and 13,500 feet. The Corporation will drill the well under a turnkey contract and is also participating with a 25% working interest.

Other News

Turnkey also announces that Martin Hall has resigned from the board of directors effective August 13, 2008, but will remain as the CFO of the Corporation. The board of directors wishes to thank Mr. Hall for the contributions he has made to the Corporation while a director.

Below are the Corporation's summarized financial statements:



Summary Consolidated Balance Sheet

June 30, December 31,
2008 2007
$ $
-------- --------
Assets

Current assets
Cash and cash equivalents 17,181 20,959
Restricted cash 1,000 -
Accounts receivable 768 3,580
Prepaid expenses 1,142 1,351
-------- --------

20,091 25,890

Property and equipment 79,039 65,940

Preferred supplier agreement and other 2,529 3,039
-------- --------

101,659 94,869
-------- --------
-------- --------

Liabilities and shareholders' equity

Current liabilities
Accounts payable and accrued liabilities 5,929 5,689
Current debt 2,359 -
-------- --------

8,288 5,689

Long-term debt 8,902 -
Asset retirement obligations 198 187
-------- --------

17,388 5,876
-------- --------

Shareholders' equity

Share capital 97,950 97,950

Contributed surplus 3,404 2,699

Deficit (17,083) (11,656)
-------- --------

84,271 88,993
-------- --------

101,659 94,869
-------- --------
-------- --------


Summary Consolidated Statement of Comprehensive Loss and Deficit

Three months Six months
ended June 30, ended June 30,
-------------------------------------------------
2008 2007 2008 2007
$ $ $ $
------------ ------------ ------------ ----------

Revenue
Drilling Services 3,738 5,003 11,293 6,422
Oil & Gas 1,220 104 2,477 153
------------ ------------ ------------ ----------

4,958 5,107 13,770 6,575
------------ ------------ ------------ ----------

Expenses
Operating - drilling services 6,131 4,878 12,520 6,841
Operating - oil and gas 542 24 1,142 38
General and administration 1,083 1,026 2,353 1,926
Depreciation and amortization 1,250 522 2,620 997
Stock-based compensation 341 235 705 456
Other income (14) (703) (130) (1,295)
------------ ------------ ------------ ----------
9,333 5,982 19,210 8,963
------------ ------------ ------------ ----------
Loss before income taxes (4,375) (875) (5,440) (2,388)
------------ ------------ ------------ ----------
Income taxes
Current (13) 21 (13) 21
------------ ------------ ------------ ----------
Net loss and comprehensive
loss for the period (4,362) (896) (5,427) (2,409)

Deficit - Beginning of period (12,721) (7,369) (11,656) (5,856)
------------ ------------ ------------ ----------

Deficit - End of period (17,083) (8,265) (17,083) (8,265)
------------ ------------ ------------ ----------
Net loss per share
Basic and diluted (0.18) (0.04) (0.22) (0.10)

Weighted average number
of common shares
Basic 24,187,910 24,144,575 24,187,910 24,144,575
Diluted 24,187,910 24,601,109 24,187,910 24,601,109


Summary Consolidated Statement of Cash Flows

Three months Six months
ended June 30, ended June 30,
-------------------------------------------------
2008 2007 2008 2007
$ $ $ $
------------ ------------ ------------ ----------
Cash provided by (used in)

Operating activities
Net loss for the period (4,362) (896) (5,427) (2,409)
Items not involving cash
Depreciation and amortization 1,250 522 2,620 997
Stock-based compensation 341 235 705 456
Accretion expense 5 - 9 -
Foreign exchange (gains)/losses 26 (192) 62 (212)
------------ ------------ ------------ ----------

(2,740) (331) (2,031) (1,168)
Changes in non-cash
working capital
Accounts receivable 7,533 (3,436) 2,812 (1,855)
Prepaid expenses 604 (222) 209 (352)
Accounts payable and
accrued liabilities (1,574) 392 1,545 (577)
Income and other taxes payable - - - (29)
------------ ------------ ------------ ----------

Net cash provided by
(used in) Operating
Activities 3,823 (3,597) 2,535 (3,981)

Financing activities
Issue of common shares - - - -
Issue of debt 11,370 - 11,370 -
Repayment of debt (109) - (109) -
Change in accounts payable 17 - 17 -
------------ ------------ ------------ ----------

Net cash provided by
(used in) Financing
Activities 11,278 - 11,278 -
------------ ------------ ------------ ----------

Investing activities
Purchase of property
and equipment (6,923) (4,903) (15,221) (9,685)
Other 7 7 14 14
Changes in accounts payable (1,683) (507) (1,322) (277)
------------ ------------ ------------ ----------

Net cash provided by
(used in) Investing
Activities (8,599) (5,403) (16,529) (9,948)
------------ ------------ ------------ ----------

Effect of foreign exchange
gains/(losses) on cash (26) 192 (62) 212

Increase (decrease) in cash
and cash equivalents 6,476 (8,808) (2,778) (13,717)

Cash and cash equivalents
- Beginning of period 11,705 42,610 20,959 47,519
------------ ------------ ------------ ----------

Cash and cash equivalents
- End of period 18,181 33,802 18,181 33,802
------------ ------------ ------------ ----------

Supplemental information
Interest paid 21 - 21 -
Income taxes paid (recovered) (13) 21 (132) 21


The Corporation's Financial Statements and Management 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.

Contact Information

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