Turnkey E&P Inc.
TSX : TKY

Turnkey E&P Inc.

November 17, 2008 18:43 ET

Turnkey E&P Inc. Announces Third Quarter 2008 Results and Filing for Protection Under Chapter 11 of the United States Bankruptcy Code by Its Wholly Owned U.S. Subsidiary

CALGARY, ALBERTA--(Marketwire - Nov. 17, 2008) - Turnkey E&P Inc. ("Turnkey") (TSX:TKY), today announced its financial and operating results for the three and nine months ended September 30, 2008.

These interim unaudited consolidated financial statements have been prepared on the basis that the Corporation is a going concern. The Corporation's Board of Directors has determined that its wholly owned U.S. subsidiary through which the majority of the Corporation's activities are conducted should file for protection under Chapter 11 of the United States Bankruptcy Code. Accordingly, the assets of the Corporation may not be realized at their carrying values on these financial statements and the Corporation may not be able to continue its business operations or emerge from Chapter 11.

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



Selected Consolidated Financial Information

Three Months Nine Months
Ended Ended
September 30, September 30,
---------------------------------------
2008 2007 2008 2007
$ $ $ $
---------------------------------------
Financial Results
Revenue 3,897 5,268 17,667 11,843
Operating expenses 11,038 4,264 24,700 11,143
Other income 97 558 248 1,853
Net loss (9,530) (409) (14,957) (2,818)
Loss per share - basic and diluted (0.40) (0.02) (0.62) (0.12)


September 30, September 30,
2008 2007
$ $
---------------------------------------
Financial Position
Cash and cash equivalents (including
restricted cash) 8,259 20,959
Working capital (deficiency) (1,630) 20,201
Current debt 2,533 -
Long-term debt 8,290 187
Shareholders' equity 74,875 88,993


Operating and Financial Highlights

Turnkey reported a net loss of $9,530 for the quarter ending September 30, 2008 as compared to a net loss of $409 for the same quarter in 2007.

Casing Drilling® Services

The Corporation has incurred substantial cost overruns on turnkey drilling contracts and has decided not to accept further turnkey contracts at this time. Although PIRP (pump in/pump out) downhole tools have proven more reliable than wireline retrievable tools, this method is not proficient enough to allow Turnkey to continue drilling with casing until the PIRP tools are further refined.

Three drilling rigs are currently stacked and the fourth rig will be stacked after the completion of the well currently in process.

Oil and Gas

Clear Creek Field, Louisiana

The Corporation has drilled a total of 5 wells and re-entered 1 well 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. Three wells and one re-entry are waiting on the completion of a reservoir study to determine the best completion strategy. The Corporation has commissioned the Schlumberger Corporation to conduct a reservoir study of the Clear Creek Field. New drilling activity for the Cockfield objectives has been suspended pending the results of the Schlumberger reservoir modeling/simulation study. Schlumberger's work is progressing on schedule. Results are anticipated prior to the end of the year.

Union Gas and Orbit Energy have conducted a 3-D acquisition survey (50+ square miles) over Clear Creek and other fields throughout northern Beauregard Parish. In return for allowing Clear Creek to be included in the survey, Turnkey has now received the 3-D seismic that covers Turnkey's acreage. Interpretation of the 3-D at the Wilcox level shows a well-defined structural closure. Similar geological features along trend and only a few miles away have yielded 2.5 to 4.5 MMBO. There are show wells down dip to this feature. Turnkey's acreage position covers about 60% of this structure as currently defined. It is anticipated that the 3-D will also help to better define Cockfield objectives for future drilling.

Hurricane Creek, Louisiana

Turnkey has 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. After testing up to a 10% oil cut in the Bancroft Sand, the Doornbos Sand was perforated. This zone has an initial production rate of approximately 200 BOPD with approximately 97% oil cut. The well was shut-in due to Hurricane Gustav and is currently being returned to production. Plans are moving ahead to install a nitrogen generation unit to provide an more economic gas supply for the gas lift production operations. Examination of the public records shows that the McPherson #1 performance is the better of previous Doornbos completions going back to the early 1950's.

The McPherson #2 is an offset to the McPherson #1. This well completed in the Doornbos reservoir is shut in pending the installation of the nitrogen unit to supply for the gas lift production operations. Test results to date indicate that production from this well will be similar to the McPherson #1. McPherson #2 was drilled from the same drilling pad as the McPherson #1. This cost effective approach is likely to be repeated across the entire field by drilling multiple wells from selected pad locations. The Doornbos reservoir, which had an estimated original 60 million barrels of oil in place throughout the field has only produced approximately 2.6 million barrels to date.

Based on the original farmout terms from McGowen, the McPherson #1 well earned 40 acres. Successful renegotiation of terms will now allow all subsequent wells to earn 160 acres. The farmout area is approximately 3,200 acres. Multiple pads are being identified over the field area from which wells can be directionally drilled to exploit the Doornbos reservoir.

The Corporation believes that drilling these wells with casing and completing the well in an underbalanced stimulated environment minimized formation damage and contributed to the excellent results. The Corporation intends to 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. Based on continuing success, up to five more multi-well pads would be required to fully exploit the field.

Magnolia City, South Texas

The Corporation owns a 100% working interest in 1,250 acres within the field. The field has been remapped. Several locations and two re-entry candidates have been identified. The first well in Magnolia City Field (Genesis #1) has been re-entered and sidetracked to a total depth of 5,954'. Operations experienced mechanical problems and tests proved to be non-commercial. Not all zones were tested. Cased hole logs were run in a second re-entry candidate (DeGarcia #7) and indicated two potential pay zones that need to be tested.

Preparations are being made to drill the first of three previously staked PUDs to evaluate the Frio. The first test (Jesus Garcia #1) is located updip from the Genesis #1 sidetrack. In the future, a 3-D survey is planned to image deeper Vicksburg objectives.

Participation Wells

The Corporation has drilled the Vieman #1 on the southwest flank of the Danbury Dome in Brazoria County Texas. The Vieman #1 drilled into the objective Frio Anomalina sand at 13,424' measured depth and took a major kick from gas influx. The objective interval came in high as predicted, but the casing became stuck after drilling 26' of clean sand and bringing the well under control. The well encountered the secondary "S" sand objective high as well. A decision has been made to cement the productive casing where it became stuck and attempt a completion in the Anomolina sand. If unsuccessful, the "S" sand will be completed. The Turnkey Vieman #1 is located up dip from the Humble Vieman #1 well that had a calculated absolute open flow potential test of 85 million cubic feet per day, but watered out in 1965. The target formation is defined by 3-D seismic data. The Corporation drilled the well under a turnkey contract and is also participating with a 25% working interest.

The Valjean Richard Well #1 was drilled to a total depth of 12,167 feet. Logs were run and pay was calculated in three zones. The 1st Boagni sand at 10,730' measured depth, a primary objective of the well, has an estimated 10' of calculated gas pay over water. The Homeseekers sand interval at 11,150' measured depth, also a targeted objective, has an estimated 7' of calculated gas pay over water. The Nod B sand objective at 11,934' measured depth has an additional estimated 19' of gas as indicated by log analysis. An interval between the 1st and 2nd Boagni sands at approximately 10,770' measured depth has an estimated 16' of questionable oil pay.

The structure maps on the 1st Boagni, Homeseekers and Nod B sands are being revised to reflect the new log data. Using the defined zones of gas pay in the 1st Boagni, Homeseekers, and Nod B sands and estimated drainage areas, the well could have the capability of producing at least 2 to 3 BCF of gas. The possible oil sands at approximately 10,770' measured depth could add an undetermined volume of oil to reserves. Later testing will determine the potential of the quantity and value of this zone. This well is currently being evaluated for completion.

As reported earlier, Turnkey drilled the Forestar #1 on a "turnkey" drilling basis to the Upper Wilcox formation at approximately 11,650'. The well was tested on a 14/64th choke at a rate of 525 BFPD (barrels of fluid per day) with an oil cut of 32% or 170 BOPD (barrels of oil per day) and a FTP of 900 PSI. The installation of the production facilities are almost completed after some rain delays and production is estimated to start in the last half of November. The Cowpen Creek prospect is comprised of approximately 700 acres and seismic indicates several offset locations with multiple Wilcox horizons. Turnkey has a 35% working interest and a 34.07% net revenue interest before payout and a 25.55% after payout.

Also reported earlier, Turnkey directionally drilled the Cailouet Heirs #1 on a "turnkey" drilling basis to the geopressured Miocene objective at approximately 12,000'. The well is currently being completed based on encountering a 150' section of possible pay based on log data and should be tested by the end of the November. Production is anticipated to begin in December. The Cailouet Heirs prospect encompasses 414 acres where Turnkey has a 10% working interest. The corporation's net revenue interest is 7.2% before payout and 5.4% after payout. The pre-drill reserve estimates based on seismic are 32 BCF and 1.12 MM barrels of condensate.



Below are the Corporation's summarized financial statements:

Summary Consolidated Balance Sheet
(stated in thousands of U.S. dollars)

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

Current assets
Cash and cash equivalents 7,259 20,959
Restricted cash (note 6) 1,000 -
Accounts receivable 1,452 3,580
Prepaid expenses 1,104 1,351
----------------------------

10,815 25,890
Property and equipment (note 4) 85,058 65,940

Preferred supplier agreement and other (note 5) 2,270 3,039
----------------------------

98,143 94,869
----------------------------
----------------------------

Liabilities and shareholders' equity

Current liabilities
Accounts payable and accrued liabilities 12,445 5,689
Current debt 2,533 -
----------------------------

14,978 5,689

Long-term debt 8,078 -
Asset retirement obligations 212 187
----------------------------

23,268 5,876
----------------------------
Shareholders' equity

Share capital 97,950 97,950

Contributed surplus 3,538 2,699

Deficit (26,613) (11,656)
----------------------------

74,875 88,993
----------------------------

98,143 94,869
----------------------------
----------------------------


Summary Consolidated Statement of Comprehensive Loss and Deficit

Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------
2008 2007 2008 2007
$ $ $ $
-------------------------------------------
Revenue
Drilling Services 2,567 4,888 13,860 11,309
Oil & Gas 1,330 380 3,807 534
-------------------------------------------

3,897 5,268 17,667 11,843
-------------------------------------------

Expenses
Operating - drilling services 10,141 4,174 22,661 11,015
Operating - oil and gas 897 90 2,039 128
General and administration 705 997 3,058 2,923
Interest 302 - 323 -
Depreciation and amortization 1,346 690 3,966 1,687
Stock-based compensation 133 284 838 740
Other income (note 8) (97) (558) (248) (1,853)
-------------------------------------------

13,427 5,677 32,637 14,640
-------------------------------------------

Loss before income taxes (9,530) (409) (14,970) (2,797)
-------------------------------------------

Income taxes
Current - - (13) 21
-------------------------------------------

Net loss and comprehensive loss
for the period (9,530) (409) (14,957) (2,818)

Deficit - Beginning of period (17,083) (8,265) (11,656) (5,856)
-------------------------------------------

Deficit - End of period (26,613) (8,674) (26,613) (8,674)
-------------------------------------------

Net loss per share
Basic and diluted (0.40) (0.02) (0.62) (0.12)

Weighted average number of
common shares
Basic 24,187,910 24,145,686 24,187,910 24,144,945
Diluted 24,187,910 24,372,172 24,187,910 24,371,431


TURNKEY E & P INC
Consolidated Statements of Cash Flows
For the three and nine months ended September 30, 2008 and 2007
----------------------------------------------------------------------------
Summary Consolidated Statement of Cash Flows

Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------
2008 2007 2008 2007
$ $ $ $
----------------------------------------
Cash provided by (used in)

Operating activities
Net loss for the period (9,530) (409) (14,957) (2,818)
Items not involving cash
Depreciation and amortization 1,346 690 3,966 1,687
Stock-based compensation 133 284 838 740
Accretion expense 4 9 13 9
Foreign exchange (gains)/losses 83 (183) 145 (395)
----------------------------------------

(7,964) (391) (9,995) (777)
Changes in non-cash working capital
Accounts receivable (684) (1,597) 2,128 (258)
Prepaid expenses 38 (682) 247 (1,034)
Accounts payable and accrued
liabilities (6,405) (425) 7,967 (1,002)
Income and other taxes payable - - - (29)
----------------------------------------
Net cash provided by (used in)
Operating Activities (2,205) (881) 347 (3,100)

Financing activities
Issue of common shares - 17 - 17
Issue of debt - - 11,370 -
Repayment of debt (650) - (759) -
----------------------------------------
Net cash provided by (used in)
Financing Activities (650) 17 10,611 17
----------------------------------------
Investing activities
Purchase of property and equipment (7,102) (6,651) (22,323) (16,336)
Other 7 14 21 28
Changes in accounts payable 111 (250) (1,211) (527)
----------------------------------------

Net cash provided by (used in)
Investing Activities (6,984) (6,887) (25,513) (16,835)
----------------------------------------

Effect of foreign exchange
gains/(losses) on cash (83) 183 (145) 395

Increase (decrease) in cash and cash
equivalents (9,922) (5,806) (12,700) (19,523)

Cash and cash equivalents
- Beginning of period 18,181 33,802 20,959 47,519
----------------------------------------
Cash and cash equivalents
- End of period 8,259 27,996 8,259 27,996
----------------------------------------
Supplemental information
Interest paid 302 - 323 -
Income taxes paid (recovered) - - (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.

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