Bow Valley Energy Ltd. reports on its financial and operating results for the nine months ended September 30, 2005.
Highlights
• Third quarter cash flow of $6.7 million ($0.10 per share) is up 134% (150% per share) year-over-year; nine month cash flow of $21.7 million ($0.34 per share) is up 102% (100% per share) year-over-year;
• Third quarter earnings of $0.6 million ($0.01 per share) are up 133% (133% per share) year-over-year; nine month earnings of $3.3 million ($0.05 per share) are up 196% (200% per share) year-over-year;
• Debt and working capital deficiency of $21.3 million represents a debt to cash flow (2005 nine months annualized) ratio of 0.7 times, not including net proceeds of $20.7 million from a recent equity issue which closed on October 19, 2005;
• Sales volumes for the third quarter averaged 2,744 boe/d, up 18% year-over-year; sales volumes for the nine month period averaged 3,376 boe/d, up 28% year-over-year;
• Current production is approximately 3,000 boe/d (Canada - 2,200 boe/d; U.K. 800 boe/d). In addition to recently bringing on shut-in volumes at Rosevear, the Company has had six recent discoveries in the Peace River Arch and West Central Alberta areas and expects to bring 500-600 boe/d (net) of new production on before year end;
• The tie-back of Kyle production to the Ramform Banff was completed in mid-September and fourth quarter operating costs at Kyle will show significant improvement. To effect the tie-back, the Kyle field was shut-in for five weeks in the third quarter, negatively affecting sales volumes in the quarter. Production has resumed and is
approximately 5,600 boe/d gross (800 boe/d net);
• The Blane and Enoch field developments continue to progress towards first production. Drilling is expected to begin on Blane in early 2006, with Enoch following sequentially. Initial production from these fields is expected in the fourth quarter of 2006 at approximately 32,000 boe/d (gross), 4,000 boe/d (net);
• Bow Valley and partners have submitted a field development plan for the Chestnut field to the U.K. government and approval is expected shortly. This field will add approximately 10,000 b/d (gross), 1,513 b/d (net) of oil production in mid-2007. Development costs are expected to be approximately C$8.00 per barrel, making this project extremely profitable in the current commodity price environment;
• Bow Valley was successful in acquiring three exploration blocks in the North Sea in the third quarter. The Company acquired a 100% working interest in two blocks in the U.K. 23rd Offshore Oil and Gas Licensing Round and acquired a 70% interest in a third block from an international major oil and gas company. These blocks provide the basis for plans to drill two operated high working interest exploration wells in 2007;
• The Company has approved a budget of $105 million for 2006 (2005 - $45 million) representing spending of $40 million in Canada and $65 million in the U.K. The U.K. budget includes $11 million of exploration and $54 million of development expenditures. The U.K. budget could increase to include projects such as the acceleration of the development of the Ettrick field, which may lead to first production in early 2008.
Operations Update
Canada
Production in the third quarter averaged slightly less than 2,100 boe/d, but was reduced to reported sales volumes of 1,981 boe/d due to prior period adjustments. The reported sales volumes figure of 1,981 boe/d represents year-over-year growth of 38% and quarter-over-quarter growth of 4%. With a de-bottlenecking project of a facility in the Rosevear area completed, current production is approximately 2,200 boe/d.
Bow Valley expects to achieve its production addition targets for 2005, in spite of significantly higher costs for equipment and services industry-wide. The Company now anticipates drilling/re-entering approximately 20 wells for the year, down from the expectation of 25-30 wells for the year, but remains well positioned to meet its 2005 exit production targets. Successful recent Company-operated drilling has provided Bow Valley with 500 - 600 boe/d of production which is expected to be tied-in by the end of the year. Meeting this exit rate would represent a production replacement efficiency of less than $20,000 per boe/d, the second consecutive year efficiencies have been at this level or better.
Following an unusually wet spring in Alberta, Bow Valley has had an active third quarter and early fourth quarter. The Company has participated in the drilling of 11 gross (7.9 net) wells and 1 gross (1.0 net) re-entry, resulting in 6 gross (3.4 net) natural gas wells and 3 gross (2.5 net) oil wells. The program has concentrated on the Peace River Arch area of Alberta where two of the natural gas wells have already been tied-in for production and two others are in the process of being pipeline connected, including a farm-in for Kiskatinaw (45% working interest APO) capable of 3 mmcf/d (1.35 mmcf/d net) and a shallower test (50% working interest) capable of 1.5 mmcf/d (0.75 mmcf/d net). Two Peace River Arch area oil wells, including one capable of 100 b/d (70 b/d net) and one west-central Alberta oil well capable of 200 b/d (160 b/d net) are currently being equipped for production. The upcoming winter program will see the Company participate in an additional 10-12 wells prior to 2006 spring break-up, generally at higher working interests than has traditionally been the case.
On a year-to-date basis, the Company has drilled 16 wells (11.8 net), resulting in 10 natural gas wells (6.3 net), 2 oil wells (1.5 net), 2 suspended wells (2.0 net) and 2 unsuccessful wells (2.0 net) for a total success rate of 75% (66% net).
United Kingdom
As expected, the tie-back of Kyle production to the Ramform Banff from the Maersk Curlew Floating Production, Storage and Offloading vessel ("FPSO") was completed in the third quarter. The tie-back will result in significant operating cost savings compared to the fixed cost nature of processing oil through the Maersk Curlew FPSO. The majority of these cost savings will materialize in the fourth quarter 2005 results. Overall cost improvements of 75% are expected as a result of this project, improving economics and extending field life. Kyle production through the Ramform Banff will be facility constrained, and the operator is looking at opportunities to optimize this production. Production levels are approximately 5,600 boe/d (gross), 800 boe/d (net). The Kyle field was shut-in for approximately five weeks for the tie-back construction work, resulting in lower production and sales and higher operating costs in the third quarter. Sales volumes for the quarter averaged 763 boe/d, which was lower year-over-year by 14%.
The Blane and Enoch field developments continue to track towards first production in the fourth quarter of 2006. The operator continues to contract services to advance the projects, which have full regulatory approvals in-place. A semi-submersible rig has been contracted and initial drilling of the Blane field could begin in early 2006, with Enoch drilling to follow sequentially. An announcement has been made regarding the acquisition of the operator by a Canadian-based, experienced North Sea producer. This acquisition is not expected to affect time-lines to first oil production. Worldwide demand for oil and gas services remains tight and some project timing slippage is possible, but at this point, Bow Valley does not feel that any delays would be material.
Bow Valley and partners have submitted a field development plan for the Chestnut field, operated by Venture Production plc, to the U.K. government and approval is expected shortly. This field is expected to come on production in mid-2007 at a rate of 10,000 b/d gross (1,513 b/d net) and produce into a Sevan SSP FPSO. Development costs for this field equate to approximately C$8.00 per barrel, resulting in extremely positive economics in the current pricing environment.
A fourth development project, Ettrick, also now appears likely to be accelerated. The project operator has submitted an environmental study to the U.K. government, which is a precursor to development approval, expected in early 2006. The field was expected to be tied-back to the Buzzard platform in the 2010 - 2012 time frame, but the operator has been evaluating means of accelerating the time-line to first production by utilizing a stand alone FPSO. An accelerated program could see first oil by early 2008 at initial rates in excess of 20,000 boe/d (gross), 2,400 boe/d (net).
With the Blane, Enoch and Chestnut projects proceeding as expected, and if Ettrick is accelerated to the end of 2007, Bow Valley's U.K. production could exit 2007 in excess of 7,000 boe/d, from current levels of less than 1,000 boe/d.
In anticipation of the increase in cash flow from these development projects, the Company has begun to assemble a suite of exploration prospects. In the third quarter, Bow Valley was successful in acquiring three exploration blocks. Two blocks were acquired at 100% working interest in the U.K. 23rd Offshore Oil and Gas Licensing Round, and a third block was acquired from a major international oil and gas producer at 70% working interest. The Company plans to accelerate its exploration program, operating two high working interest exploration wells in 2007. Bow Valley has six exploration prospects in the North Sea, at working interests ranging from 12% to 100%.
Outlook and 2006 budget
Bow Valley's Board of Directors has approved a budget of $105 million for 2006. This budget will see spending of approximately $40 million in Canada, which the Company expects to fund 30 - 35 wells. Spending in the U.K. is budgeted at $65 million, including $54 million of development expenditures and $11 million of exploration expenditures. The U.K. development budget is expected to fund Blane and Enoch to first production late in 2006 and advance the Chestnut field towards first production in mid-2007. The U.K. exploration budget contemplates participating in two exploration wells in the North Sea in 2006, as well as shooting and processing/reprocessing seismic on the Company's recently acquired exploration acreage, with expectations of exploration drilling in 2007.
The Company is preparing for an active winter drilling program in Canada, with one rig under contract. The Company may contract an additional rig if available. However, the Canadian industry activity is expected to continue at record levels during this period, and delays caused by shortages of equipment and services are now a real possibility. At this time, management's estimate of a 2006 exit rate would be in the range of 3,100 - 3,500 boe/d representing 20-30% year-over-year growth.
The Blane and Enoch field developments continue towards first production in the fourth quarter of 2006, now less than twelve months away. At that time, Bow Valley expects to be producing approximately 8,000 boe/d from Canada and the U.K. With Chestnut scheduled for first production in 2007 and the prospect of Ettrick coming on production by late 2007 or 2008, further strong growth in volumes is expected into 2007/8.