Veteran Resources Inc.
TSX : VTI

Veteran Resources Inc.

August 15, 2005 09:00 ET

Veteran Resources Inc. Announces 2005 Second Quarter Results and Increased Production

CALGARY, ALBERTA--(CCNMatthews - Aug. 15, 2005) - Veteran Resources Inc. (TSX:VTI)

Veteran is pleased to provide its second quarter, 2005 financial results and activity update. The second quarter was highlighted by:

- Bringing on 3 MMcf per day of new natural gas production at Earring, Alberta.

- Initiating operations under the Cecil joint venture

- Expanding the 2005 capital budget by $5 million to $21 million

- Entering into an agreement to sell our Ontario assets

- Announcing a bought deal financing for gross proceeds of $6.2 million

During the second quarter, Veteran participated in the drilling of four (1.3 net) wells resulting in two oil wells, one suspended well which is currently being tested, and one dry hole. In total the Company has participated in 17 (9.7 net) wells during the first half of 2005 with an overall success rate of 71 percent. We remain on track to achieve our goals of 1,800 boe per day in production by October and 2,000 boe per day by year-end, with expected average production for 2005 of 1,300 to 1,400 boe per day.

Earring, AB

Production from the first Earring well commenced in late June and is currently producing at 3 MMcf (500 boe) per day from the Belloy Formation. The well is capable of producing at higher rates but is restricted by pipeline capacity. Testing is underway to determine if the pipeline can accommodate additional volumes from the Belloy Formation or the tying-in of a shallower zone in the well.

At the second Earring well, excessively wet field conditions delayed access to completion equipment until the first week of August. The well is currently being completed for an oil zone which may lead to additional development drilling during the third quarter.

Cecil, AB

During the second quarter, the Company participated in three (1.0 net) Kiskatinaw Formation wells. Two of the wells are oil wells that recently commenced production and the third is suspended while undergoing pressure tests to determine reservoir quality. A fourth well, at 100 percent working interest, was drilled in July and is currently being completed as an oil well. Two more operated wells, averaging 70 percent working interest, are expected to be drilled by year-end.

A portion of the Cecil pool, in which Veteran has 26 percent working interest, has now been granted Good Production Practice (GPP) which permits the operator, at its discretion, to produce each well at rates designed to maximize ultimate recoverable reserves. At this time production rates are being maintained at previous levels until more production data is obtained in order to justify any potential rate increase. A similar application has been submitted by the Company, relating to its 100 percent working interest well, and a response is expected during the third quarter.

Cecil Joint Venture

In June, the Board of Directors approved a $5 million increase to the 2005 capital budget that now totals $21 million. The majority of the increased expenditures were committed to the Cecil joint venture relating primarily to the acquisition of land and seismic. During spring breakup up, which was followed by an unusually wet early summer, drilling activity ceased. Veteran's explorationists used this time to develop prospects on both Crown and third party lands. Prospecting was supported by access to 130 square miles of three-dimensional (3D) seismic program that is part of the joint venture arrangement. This has provided the Company with comprehensive information and a competitive advantage when bidding at land sales or negotiating farm in opportunities.

The result is improved success at Crown land sales and to date we have accumulated 10 sections (6,400 acres) of land, each at a 50 percent operated working interest. Furthermore, 20 sections (12,800 acres) were posted by the Company for Crown land sales over the next three months as we continue to expand operations throughout the Cecil area.

Veteran has also committed to drill a Mississippian test well in order to earn 100 percent working interest, subject to a gross overriding royalty, in three sections (1,920 acres) of land. The well is programmed to commence drilling by November and will be coordinated with additional drilling in the area.

A 24 square mile 3D seismic program, which pertains to a portion of the joint venture that does not have seismic coverage, has been shot and the data are now being processed. Once completed, the data will be integrated into the existing seismic programs resulting in more than 160 contiguous square miles of 3D coverage. Interpretation of the new data is expected to be completed in August and will be instrumental in evaluating both posted Crown land sales and working interest lands.

The Company's objective for the joint venture area is to accumulate sufficient lands in 2005 to form the basis of its 2006 exploration drilling program. Since the majority of the land is evaluated by 3D seismic data, we expect to be able to commence drilling operations in the fourth quarter of 2005 and continue directly through to spring breakup in 2006. To guarantee drilling rig availability, the Company has secured an option to contract a rig for the winter and expects to enter into formal agreement once the drilling schedule is finalized.

Gunnell, BC

Building on the success of last winter's drilling program, which delivered three superior producing wells, the operator at Gunnell has proposed a significantly expanded drilling program for 2005/2006. Utilizing 3D seismic, the multi-well program calls for a minimum of eight locations, and possibly as many as 20 locations, to be drilled commencing in the fourth quarter of 2005 and continuing through 2006. Veteran's average working interest is expected to be approximately 25 percent, when including the impact of pooling of interests associated with these long reach horizontal wells.

The operator is also proposing to construct additional infrastructure to handle the expected increase in production and to facilitate a quick transition from drilling to producing each well. Assuming the program proceeds as planned, Gunnell is expected to impact significantly on Veteran's production starting later this year and in 2006.

Asset Dispositions

Veteran's strategy of growth by the drill bit requires that we focus our activity on our core areas, specifically the Peace River Arch, Gunnell and, to a lesser extent, Snowfall. As production grows, rationalization of non-core assets will continue in order to maximize return on investment from our more profitable core areas.

The Company initiated this process in April with the sale of 25 boe per day at Barons, Alberta for $1.3 million. This was followed in late June with the announced sale of all the Company's Ontario assets, amounting to approximately 70 boe per day, for a total consideration of $4.3 million effective June 1. The disposition was originally expected to close in July but is now delayed, at the request of the purchaser, until December 1, with a matching effective date. Veteran received a non refundable deposit on signing the deal. In consideration of extending the closing, Veteran received an additional $200,000 non refundable deposit and a two-year warrant representing 10 percent of the shares to be sold in a financing by the purchaser relating to the acquisition. Production and cash flow will remain to the benefit of Veteran until closing occurs.

Outlook

Third and fourth quarter drilling will be directed to the Peace River Arch and Gunnell areas while land acquisitions and farm ins will be focused on the Cecil joint venture area. We expect to drill at least eight additional wells before year-end with the potential to drill more wells depending on the timing of drilling at Gunnell.

On June 30 the Company announced a bought deal financing that was significantly over subscribed and generated gross proceeds of $6.2 million. These monies were effectively used to finance the $5 million increase to the capital budget. As a result, notwithstanding an increase to the capital budget, exit debt is still expected to be less than $10 million. This will be further reduced on receipt of funds upon completion of the Ontario asset sale.

2005 will be another year of significant growth for Veteran. Based on results to date, we are confident that the recently expanded $21 million capital program will result in record exit production of 2,000 boe per day at top tier finding and development costs.



HIGHLIGHTS

Three months ended
June 30,
2005 2004 Change
------------------------------------------------------------------------

FINANCIAL (unaudited)
Oil and natural gas revenues $ 4,312,823 $ 2,228,083 94%

Funds from operations (1) $ 1,945,665 $ 1,014,164 92%
Per common share - basic $ 0.03 $ 0.02
Per common share - diluted $ 0.03 $ 0.02

Net earnings $ 448,792 $ 81,289 452%
Per common share - basic $ 0.01 $ -
Per common share - diluted $ 0.01 $ -

Capital expenditures $ 3,761,761 $ 1,225,341 207%
Property dispositions $ (1,515,426) $ - -
----------------
$ 2,246,335

Common shares outstanding June 30
Basic 63,008,706 57,928,706 9%
Weighted average - basic 62,912,552 57,927,882 9%
Diluted 68,189,706 67,334,856 1%

OPERATIONS
Average daily sales
Natural gas (mcf per day) 3,656 1,952 87%
Crude oil (bbl per day) 282 210 34%
Natural gas liquids (bbl per day) 39 26 50%
Barrels of oil equivalent
(boe per day) 930 561 66%

Average sales price
Natural gas (per mcf) $ 8.02 $ 6.89 16%
Crude oil (per bbl) $ 55.49 $ 47.64 16%
Natural gas liquids (per bbl) $ 62.44 $ 39.52 58%

Netback pricing
(per barrel of oil equivalent)
Oil and natural gas revenues $ 50.95 $ 43.63 17%
Royalties $ (9.19) $ (6.70) 37%
Production $ (10.95) $ (9.52) 15%
-------------------------------------
$ 30.81 $ 27.41 12%
-------------------------------------
-------------------------------------


------------------------------------------------------------------------
Wells drilled
Gross 4 2
Net 1.33 1.26
Success rate 67% 50%
------------------------------------------------------------------------


Six months ended
June 30,
2005 2004 Change
------------------------------------------------------------------------

FINANCIAL (unaudited)
Oil and natural gas revenues $ 8,033,100 $ 4,151,125 94%

Funds from operations (1) $ 3,850,919 $ 1,943,210 98%
Per common share - basic $ 0.06 $ 0.03
Per common share - diluted $ 0.06 $ 0.03

Net earnings $ 934,442 $ 11,444 8065%
Per common share - basic $ 0.01 $ -
Per common share - diluted $ 0.01 $ -

Capital expenditures $ 13,777,373 $ 3,901,190 253%
Property dispositions $ (1,515,426) $ - -
----------------
$ 12,261,947

Working capital deficiency,
including bank loan $ 16,585,254 $ 4,811,746 245%

Shareholders' equity $ 24,686,023 $ 21,987,601 12%

Common shares outstanding June 30
Basic 63,008,706 57,928,706 9%
Weighted average - basic 62,535,060 57,906,936 8%
Diluted 68,189,706 67,334,856 1%

OPERATIONS
Average daily sales
Natural gas (mcf per day) 3,492 1,735 101%
Crude oil (bbl per day) 267 218 22%
Natural gas liquids (bbl per day) 40 22 83%
Barrels of oil equivalent
(boe per day) 889 529 68%

Average sales price
Natural gas (per mcf) $ 7.79 $ 6.84 14%
Crude oil (per bbl) $ 55.57 $ 46.28 20%
Natural gas liquids (per bbl) $ 57.80 $ 38.98 48%

Netback pricing
(per barrel of oil equivalent)
Oil and natural gas revenues $ 49.91 $ 43.11 16%
Royalties $ (8.10) $ (6.34) 28%
Production $ (10.59) $ (8.73) 21%
-------------------------------------
$ 31.22 $ 28.04 11%
-------------------------------------
-------------------------------------


------------------------------------------------------------------------
Wells drilled
Gross 17 8
Net 9.70 2.30
Success rate 71% 63%
------------------------------------------------------------------------

(1) Funds from operations is a non-GAAP measure that represents cash
generated from operating activities before changes in non-cash
working capital and is used by the Company to analyze operating
performance, leverage and liquidity. Funds from operations may not
be comparable to similar measures used by other companies.


All calculations converting natural gas to crude oil equivalent in this
report have been made using an industry accepted ratio of six thousand
cubic feet of natural gas to one barrel of crude oil.


BALANCE SHEETS
(Unaudited)

As at June 30, 2005 December 31, 2004
------------------------------------------------------------------------

ASSETS

Current

Accounts receivable $ 7,915,251 $ 3,076,374
Prepaid expenses 108,296 134,755
------------------------------------------------------------------------

8,023,547 3,211,129

Capital assets (Note 2) 45,406,885 34,436,786
------------------------------------------------------------------------

$ 53,430,432 $ 37,647,915
------------------------------------------------------------------------
------------------------------------------------------------------------


LIABILITIES

Current
Bank overdraft $ 3,261,290 $ 254,684
Accounts payable and
accrued liabilities 8,669,511 5,957,296
Bank loan (Note 3) 12,678,000 5,528,000
------------------------------------------------------------------------

24,608,801 11,739,980

Asset retirement obligations
(Note 4) 2,152,708 1,670,088

Future income taxes 1,982,900 1,101,272

Contingencies (Note 9)

SHAREHOLDERS' EQUITY
Share capital (Note 5) 21,982,073 21,702,999
Contributed surplus (Note 6) 640,709 304,777
Retained earnings (Note 5) 2,063,241 1,128,799
------------------------------------------------------------------------

24,686,023 23,136,575
------------------------------------------------------------------------

$ 53,430,432 $ 37,647,915
------------------------------------------------------------------------
------------------------------------------------------------------------


STATEMENTS OF EARNINGS AND RETAINED EARNINGS (DEFICIT)
(Unaudited)
------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
2005 2004 2005 2004
------------------------------------------------------------------------

REVENUES
Oil and natural gas $ 4,312,823 $ 2,228,083 $ 8,033,100 $ 4,151,125
Royalties, net of ARTC (777,617) (342,109) (1,303,656) (610,588)
------------------------------------------------------------------------
3,535,206 1,885,974 6,729,444 3,540,537
------------------------------------------------------------------------

EXPENSES
Production 926,764 486,060 1,704,158 840,182
General and
administrative 653,584 402,911 1,235,871 767,374
Financing charges 180,295 43,479 285,690 95,183
Depletion, depreciation
and accretion 996,960 870,869 1,914,590 1,811,988
------------------------------------------------------------------------
2,757,603 1,803,319 5,140,309 3,514,727
------------------------------------------------------------------------

Earnings before taxes 777,603 82,655 1,589,135 25,810
Capital taxes - 1,366 - 14,366
Future income taxes
(note 7) 328,811 - 654,693 -
------------------------------------------------------------------------

Net earnings for
the period 448,792 81,289 934,442 11,444
Retained earnings
(deficit), beginning
of period 1,614,449 (6,914,748) 1,128,799 (6,844,903)
Elimination of deficit
through reduction of
share capital (Note 5) - 6,844,903 - 6,844,903
------------------------------------------------------------------------
Retained earnings,
end of period $ 2,063,241 $ 11,444 $ 2,063,241 $ 11,444
------------------------------------------------------------------------
------------------------------------------------------------------------

Earnings per common
share (Note 5)
Basic $ 0.01 $ - $ 0.01 $ -
------------------------------------------------------------------------
------------------------------------------------------------------------
Diluted $ 0.01 $ - $ 0.01 $ -
------------------------------------------------------------------------
------------------------------------------------------------------------


STATEMENTS OF CASH FLOWS
(Unaudited)
------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
2005 2004 2005 2004
------------------------------------------------------------------------

OPERATING ACTIVITIES

Net earnings for the
period $ 448,792 $ 81,289 $ 934,442 $ 11,444
Non-cash items
Stock-based
compensation 171,102 62,006 347,194 119,778
Depletion, depreciation
and accretion 996,960 870,869 1,914,590 1,811,988
Future income taxes 328,811 - 654,693 -
------------------------------------------------------------------------
Funds from operations 1,945,665 1,014,164 3,850,919 1,943,210
Expenditures on asset
retirements - - (140,125) -
Changes in non-cash
working capital (530,467) (123,325) (1,421,159) 78,120
------------------------------------------------------------------------
1,415,198 890,839 2,289,635 2,021,330
------------------------------------------------------------------------

FINANCING ACTIVITIES
Bank loan 5,475,000 725,000 7,150,000 3,200,000
Proceeds on issuance
of common shares 50,000 1,750 494,750 39,710
------------------------------------------------------------------------
5,525,000 726,750 7,644,750 3,239,710
------------------------------------------------------------------------

INVESTING ACTIVITIES
Capital asset additions (3,761,761) (1,225,341)(13,777,373) (3,901,190)
Capital asset
dispositions 1,515,426 - 1,515,426 -
Changes in non-cash
working capital (3,823,732) (1,280,785) (679,044) (1,913,060)
------------------------------------------------------------------------
(6,070,067) (2,506,126)(12,940,991) (5,814,250)

Increase (decrease)
in cash 870,131 (888,537) (3,006,606) (553,210)
Cash (bank overdraft),
beginning of period (4,131,421) 665,558 (254,684) 330,231
------------------------------------------------------------------------
Bank overdraft,
end of period $ (3,261,290) $ (222,979)$(3,261,290) $ (222,979)
------------------------------------------------------------------------
------------------------------------------------------------------------

Cash taxes $ - $ 46,420 $ - $ 46,420
Interest paid $ 184,527 $ 39,448 $ 289,922 $ 89,745


Caution to Reader

This report contains forward-looking statements and the reader is cautioned not to place undue reliance on these statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur. Although Veteran believes that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. These statements are based on current expectations that involve a number of risks and uncertainties including but not limited to: the risks associated with the oil and gas industry (e.g., operational risks in development, exploration, and production; the uncertainty of reserve estimations; the uncertainty of estimates and projections relating to production, costs and expenses, and health, safety, and environmental risks), commodity price and exchange rate fluctuations and uncertainties resulting from potential delays or changes in plans with respect to exploration or development projects or capital expenditures. Additional information on these and other factors that could affect Veteran's operations or financial results are included in Veteran's reports on file with regulatory authorities. The Company cautions that events or circumstances could cause actual results to differ materially from those projected. Particular risks related to the forward-looking statements addressed above are:

- Actual drilling results achieved in 2005 may differ from the levels of risk assigned by the Company, or the Company's drilling program could change if results are not as estimated, which will affect estimates of production volumes and cash flows.

- Actual prices received by the Company for its commodity sales may differ from the pricing estimates used in projections, based upon forecasts utilized by the Company's independent reservoir engineers Sproule Associates Limited, which will affect estimates of cash flows.

- The average estimated 2005 foreign exchange rate, based upon a forecast utilized by the Company's independent reservoir engineers Sproule Associates Limited, may differ from actual exchange rates for the year, which will affect estimates of cash flows.

- Actual interest rates may differ from estimates used by the Company which will affect estimates of cash flows.

- The cost of materials and services required to complete the 2005 drilling program may differ from cost estimates used by the Company. If this difference is significant, there may be an impact on the number of wells drilled in 2005 by the Company.

- The cost of materials and services required to operate producing wells may differ from cost estimates used by the Company which will affect estimates of cash flows.

Conversion

Boe's are derived by converting natural gas to oil in the ratio of 6 mcf to 1 bbl. Boe's may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf to 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent an equivalency at the wellhead.

Contact Information

  • Veteran Resources Inc.
    Philip J. Loudon
    President and Chief Executive Officer
    (403) 699-8629
    or
    Veteran Resources Inc.
    J. Peter Henry
    Vice President and Chief Financial Officer
    (403) 699-8632
    Website: www.veteranresources.net