Bow Valley Energy Ltd. announces its financial and operational results for the three months ended March 31, 2008.
HIGHLIGHTS
• Sales volumes averaged 4,717 boe/d in the first quarter of 2008, an increase of 475% from the first quarter of 2007 and 25% from the fourth quarter of 2007.
• Field production volumes in the first quarter of 2008 were 3,995 boe/d, 3% lower than fourth quarter estimated field volumes of 4,134 boe/d (reported as 4,388 boe/d due to positive prior period volume accrual adjustments booked in the fourth quarter of 2007).
• Funds flow in the first quarter of 2008 was $31.9 million ($0.37 per share), which represents a significant increase from funds flow of $3.0 million ($0.04 per share) in the first quarter of 2007 and funds flow of $22.2 million ($0.26 per share) in the fourth quarter of 2007.
• The Company recorded a net loss of $3.2 million in the first quarter of 2008 (loss of $0.04 per share), a decrease over earnings from the first quarter of 2007 (income of $0.5 million). The Company recorded an unrealized foreign exchange loss of $6.5 million in the first quarter of 2008, driven by the weakening of the Canadian dollar relative to the U.S. dollar and British pound sterling. The Company also recorded an unrealized fair value impairment of $4.8 million in respect of its Asset Back Commercial Paper ("ABCP") holdings.
• U.K. operating netbacks were robust, averaging $82.14 per boe, an increase of 61% from the first quarter of 2007 and an increase of 14% from the operating netbacks during the fourth quarter of 2007. Operating and transportation costs averaged $6.43 per boe in the first quarter of 2008.
• The Company recorded capital spending of $40.8 million in the first quarter of 2008.
• The ratio of working capital deficit to first quarter annualized funds flow equaled 1.1 times. If the Company's investment in ABCP is included at the current carrying value, the working capital deficit to first quarter annualized funds flow drops to 0.9 times.
• The Company announced a potential exploration success in Alaska. The Tofkat No.1 well penetrated 10 feet of gross pay (6 feet of net pay) in the Kuparak formation.
• The Company announced the hiring of two new employees in its U.K. office. Peter Gunn has been hired as Finance Director of Bow Valley Petroleum (UK) Limited and Norman McLeod has been hired as Technical Director of Bow Valley Petroleum (UK) Limited.
OPERATIONS UPDATE
UNITED KINGDOM
The first quarter of 2008 was the second consecutive quarter the Company had the Kyle, Enoch and Blane fields on production. Sales production of 4,717 boe/d was positively affected by lifting of volumes from inventory, largely attributable to the Blane field. The Company held approximately 64,000 barrels of oil in inventory at the end of the first quarter. Field production of 3,995 boe/d was lower than the fourth quarter of 2007 volumes of 4,388 boe/d mostly due to positive prior period volume accrual adjustments that were booked in the fourth quarter of 2007. Actual production in the fourth quarter of 2007 was estimated to be 4,134 boe/d. Field production volumes of 3,995 boe/d in the first quarter of 2008 represent a decrease of 3% from 4,134 boe/d in the fourth quarter of 2007. Overall, the Company's production from each of the Kyle, Enoch and Blane fields has remained relatively steady over the past six months with only modest declines. Production was up dramatically (468%) over the first quarter of 2007, due to the addition of production from the Blane and Enoch fields.
Current production is approximately 4,000 boe/d. The Company expects production to average 3,500 to 3,800 boe/d in the second quarter of 2008. The expected decrease in production volumes in the second quarter is due to platform maintenance and upgrades, the Forties pipeline system shut-down in late April and natural declines in the period. The Company currently expects liftings in the second quarter to be lower than first quarter liftings and lower than average production levels, resulting in a build of oil inventory volumes. Lifting schedules are adjusted frequently and may result in changes from current expectations.
U.K. field operating netbacks averaged $82.14 per boe, an increase of 61% from the first quarter of 2007 and 14% from the operating netbacks during the fourth quarter of 2007. The robust netbacks are the result of the Company receiving high wellhead prices combined with low operating costs. The average wellhead price realized during the first quarter of 2008 was $88.77 per boe compared to $62.43 per boe in the first quarter of 2007 and $78.36 per boe in the fourth quarter of 2007 representing an increase of 42% per boe and 13% per boe respectively. Each of the three fields which currently contribute to production are tied-back to production facilities which charge tariff based operating and transportation costs. Operating and transportation costs averaged $6.43 per boe in the first quarter of 2008, an increase of 17% per boe from the prior quarter. Operating and transportation costs are expected to increase with the addition of production from the Chestnut and Ettrick fields which will produce into Floating Production Storage and Offloading Vessels ("FPSO") on a fixed cost arrangement basis. However, the Chestnut and Ettrick fields will yield a higher proportion of oil sales which should contribute to higher average wellhead prices.
The Company recorded U.K. capital expenditures of $34.3 million in the first quarter, which consisted of $18.1 million in exploration expenditures, $13.4 million in development expenditures (largely attributable to the Ettrick field development) and $2.8 million in capitalized interest and other.
The Chestnut field is expected to come on stream at the end of the second quarter or early in the third quarter of 2008. This field is expected to add production of 10,000 boe/d gross (1,500 boe/d net). The partners have agreed to drill a third Chestnut field well to access additional upside, which is expected to be drilled in the third quarter of 2008.
The Ettrick field is expected to commence production early in the fourth quarter of 2008, later than recent estimates of August, 2008, caused by the delayed deployment of the FPSO, from the Sembewang Shipyard in Singapore.
The Company expects to participate in the drilling of three to five exploration wells over the next twelve months, including a non-operated well on the Blackbird prospect (12% working interest) which was spud in late April of 2008, operated exploration wells on the Company's 16/27 (70% working interest) and 22/11 (100% working interest) blocks in the second half of 2008 (subject to rig availability), as well as a number of potential farm-in opportunities which are currently under consideration.
ALASKA
The Company's 2008 exploration program in Alaska yielded an oil discovery at Tofkat. The Tofkat No.1 exploration well (20% working interest) encountered 10 feet of gross pay (6 feet of net pay), comparable to the Nanuq field. The Company does not yet have a clear understanding of the aerial extent of the discovery. The joint venture group was able to acquire approximately 210 square miles of 3D seismic over the prospective area which will be used to evaluate the extent of the accumulation. The 3D seismic will be processed and analyzed in mid to late 2008, in preparation for an appraisal drilling program in the 2009 winter drilling season. The 3D seismic will also be used to evaluate uphole potential in the Brookian aged formations encountered in each of the wellbores. The Company recorded capital expenditures of $6.5 million in the first quarter of 2008 in respect of its Alaska operations.
CORPORATE
The Company was very active during the first quarter of 2008 and also reached some significant milestones. Bow Valley operated its first offshore exploration program by drilling the 9/28b-19a and 16/27a-8 wells in the central portion of the UK North Sea. The outcome of the first two wells is disappointing, but represents a kick-off of the Company's operated exploration program. The 9/28-19a well encountered a four-way dip closed structure with 105 feet of oil charged reservoir. Although the results appear exciting, the associated reserves are considered too small to develop as a stand-alone development. The second well at 16/27a-8 was a shallow test to evaluate an Eocene seismic anomaly. The well encountered reservoir with no hydrocarbons.
The sale of the Canadian assets in 2007 resulted in a significant shift and weighting of the Company's operations to the U.K. Building on this platform, the Company has been active in recruiting additional staff to manage its operations and help lead further growth. In this regard, the Company announced the addition of Mr. Peter Gunn as Finance Director of Bow Valley Petroleum (UK) Limited and Mr. Norman McLeod as Technical Director of Bow Valley Petroleum (UK) Limited. The Company also intends to hire an Exploration Director. Mr. Gunn joins the Company with 30 years of experience working for various oil and gas companies. Mr. Gunn is a qualified Chartered Accountant and most recently held the position of Finance Director at Newfield Petroleum UK Limited. Mr. Gunn is responsible for U.K. financial reporting. As Technical Director, Mr. McLeod will be responsible for managing the Company's producing assets, overseeing field operations, future field developments and helping to evaluate new opportunities. Mr. McLeod is an engineer with over 30 years of industry experience, most recently with RPS Energy.
The Company's working capital deficiency, including bank debt, was $145.5 million due to continued capital spending related to U.K. development and exploration activities. The working capital deficiency will be financed via the Company's US$125 million senior, US$25 million mezzanine and (pnds stlg) 17.5 million term debt facilities with a syndicate of banks, led by the Bank of Scotland. In addition, the Company has a US$30 million facility with the National Bank which is secured by the Company's ABCP holdings and certain guarantees.
The Company has fair valued its investment in ABCP at $30.2 million, representing a $10.1 million (25%) impairment. Subsequent to the end of the first quarter, ABCP noteholders voted by an overwhelming margin in favour of the proposed restructuring plan for ABCP. The restructuring plan will now go before an Ontario Superior Court judge, who is to give a fairness ruling in respect of the restructuring plan in May.
OUTLOOK
The level of activity that started to climb in 2007 and continues throughout 2008 is exciting and illustrates the emergence of our balanced full-cycle strategy. Production growth commenced in May of 2007 with the addition of Enoch field volumes followed later in the year with the addition of Blane field volumes. Continuing into 2008, production will grow with the addition of Chestnut field volumes at mid-year and Ettrick field volumes in the fourth quarter. The Company has positioned itself as a low cost producer in the U.K. North Sea. An increasing production profile, combined with high netbacks, is providing significant growth in the Company's revenues and funds flow. Revenue recorded in the first quarter of 2008 represents the highest revenue quarter in corporate history.
One of the challenges faced over the past several years was financing the large capital expenditures required to develop the Company's portfolio of field developments ahead of production revenue. The Company currently has a working capital deficiency of approximately $145.5 million. When compared to the current revenue and funds flow being generated, debt levels are manageable and represent a working capital deficit to first quarter annualized funds flow equal to 1.1 times. If oil prices hold at current levels, funds flow is expected to exceed capital expenditures in 2008 and the Company's financial position will strengthen further.