Bow Valley Energy Ltd. has announced its financial and operating results for the nine months ended September 30, 2006.
Highlights
• Third quarter funds flow of $7.3 million ($0.11 per share) is up 10% (10% per share) year-over-year; nine month funds flow of $18.7 million ($0.27 per share) is down 14% (21% per share) year-over-year;
• Third quarter earnings of $1.0 million ($0.02 per share) are up 72% (100% per share) year-over-year; nine month earnings of $2.8 million ($0.04 per share) are down 16% (down 20% per share) year-over-year;
• Sales volumes for the third quarter averaged 2,546 boe/d, down 7% year-over-year; sales volumes for the nine month period averaged 2,557 boe/d, down 24% year-over-year;
• Debt and working capital deficiency of $51.9 million represents a debt to cash flow (2006 third quarter annualized) ratio of 1.8 times;
• Subsequent to the end of the third quarter, the Company closed the previously announced US$150 million debt facility with the Bank of Scotland comprised of a US$125 million senior facility and a US$25 million mezzanine facility; is the combined facilities are expected to fully fund the Company's share of capital expenditures to develop four fields in the U.K. North Sea; Enoch, Blane, Chestnut and Ettrick, as well as ongoing capital requirements for the Kyle field and certain North Sea exploration expenditures. Subsequent to the end of the quarter, the Company also agreed to an increased bank line with the National Bank of Canada for C$27.5 million;
• Corporate operating costs improved 50% on a year-over-year basis from the previous year; in the third quarter, U.K. operating costs decreased 72% year-over-year to average $8.95 per boe resulting in field operating netbacks of $65.27 per boe in the third quarter and over $60.00 per boe on a year-to-date basis;
• In the U.K. North Sea on a year-to-date basis (including two wells rig released after quarter end), the Company participated in the drilling of two development wells at Blane, one development well at Enoch and one development well at Chestnut; results for these wells were at or above expectations; the Company also participated with a 12% working interest in one unsuccessful exploration well;
• The U.K. development projects continue to progress to first production; Enoch is expected to begin production in the first quarter of 2007; Blane in the second quarter of 2007; Chestnut in the second half of 2007 and Ettrick in the second quarter of 2008; these projects in aggregate are expected to add approximately 63,000 boe/d (7,950 boe/d net) of productive capacity;
• Subsequent to the end of the quarter, the Company announced it had entered into a joint venture agreement with Alaska Venture Capital Group, LLC to participate in an exploration program to earn a 20% working interest in a portfolio of prospects on the North Slope of Alaska, subject to regulatory approval. The co-venturers were successful in the most recent land sale, with apparent high bids for almost 40,000 acres, bringing the total land position to approximately 180,000 acres gross (36,000 acres net);
• The Company has approved a budget of $100 million for 2007; the 2007 budget includes $15 million of capital spending in Canada, $10 million in Alaska, $55 million of development capital expenditures in the U.K. North Sea; and $20 million in exploration capital expenditures in the U.K. North Sea.
Overview of Operations
United Kingdom
Bow Valley continues to enjoy robust operating netbacks from its U.K. operations due to continued high oil prices and, more importantly, significant operating cost improvements. U.K. operating costs were C$8.95 per boe in the third quarter, down 72% year-over-year, resulting in a third quarter operating netback of C$65.27 per boe, compared to C$33.03 per boe in the year-ago period. On a year-to-date basis, the operating netback more than doubled to $60.62 per boe. The operating cost savings were achieved through the successful tie-back of production to the Ramform Banff, where production is processed on a tariff basis. This higher cash flow and greater profitability will extend the economic life of the field and provide the opportunity to pursue new initiatives to grow field production. The partners are in the process of recompleting a currently shut-in well and are examining the possibility of further infill drilling of the field in 2007.
Sales volumes for the third quarter averaged 912 boe/d, which was up 20% compared to the previous year. Volumes were up year-over-year due to the Company receiving its share of two tanker liftings in the current period compared to one tanker lifting in the year-ago period. Production volumes, as opposed to sales volumes, were lower due to natural field declines and the tie-back of production to the Ramform Banff. At the end of the third quarter, the Company owned approximately 12,000 barrels of oil in inventory.
The Enoch, Blane, Chestnut and Ettrick field developments continue to track towards first production within the next 3 - 18 months. All of the producing wells for the Enoch, Blane and Chestnut fields have been drilled and results have generally been equal to or better than expectations. First production from Enoch is expected in the first quarter of 2007 at an initial productivity of 15,000 boe/d (gross), 1,800 boe/d (net), while the Blane field is expected to show first production in the second quarter of 2007 at an initial productivity of 18,000 boe/d (gross), 2,250 boe/d (net). The Chestnut field is expected to come on production late in the second half of 2007 at an initial productivity of 10,000 boe/d (gross), 1,500 boe/d (net) and Ettrick is expected to come on stream in the second quarter of 2008 at initial productivity in excess of 20,000 boe/d (gross), 2,400 boe/d (net). With the four projects proceeding as expected, Bow Valley's U.K. production could reach 7,000 boe/d by mid-year 2008, from current levels of approximately 700 boe/d.
The Company continues to progress its exploration program in the North Sea with plans to operate 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%. The market for drilling rigs in the North Sea has recently shown signs of softening, and the Company is optimistic it will be able to contract the services required to drill two exploration wells in late 2007.
Subsequent to the end of the quarter, the Company closed the previously announced US$150 million debt facility with the Bank of Scotland. The facility consists of a US$125 million senior facility and a US$25 million mezzanine facility which are expected to fully fund Bow Valley's share of capital expenditures to develop the four fields at Enoch, Blane, Chestnut and Ettrick. The facility will also cover ongoing capital requirements for the Kyle field and certain exploration spending. Based upon Bank of Scotland financial projections, it is not anticipated that the senior facility will be drawn by more than 50 percent (not including exploration capital).
Alaska
Subsequent to the end of the quarter, Bow Valley entered into a joint venture agreement with Alaska Venture Capital Group, LLC ("AVCG") and its operating subsidiary Brooks Range Petroleum Corporation, under which Bow Valley will participate in an exploration program on the North Slope of Alaska. Under the terms of the transaction, and subject to regulatory approval, Bow Valley will pay 28% of specified capital expenditures to earn a 20% working interest in lands owned by AVCG, after which time Bow Valley will be a 20% working interest partner. In addition, Bow Valley has agreed to pay certain capital costs previously incurred by AVCG.
The lands covered by the agreement total approximately 140,000 acres (gross). The co-venturers have approved a budget of US$44.8 million for 2006 and calendar year 2007, which encompasses the cost of drilling two wells and acquiring seismic. A third well may be drilled if conditions permit and is also accommodated within the approved budget. In addition, the co-venturers were the apparent high bidder on 39,660 acres at the most recent Alaska North Slope and Beaufort Sea lease sales. If these bids are approved in their entirety, the total land held by the co-venturers will increase to almost 180,000 acres.
Canada
Production in the third quarter averaged 1,634 boe/d, a decrease of 18% from the third quarter of 2005 and a decrease of 10% from the second quarter of 2006. Production is lower due to natural field declines and the unexpected loss of production at two non-operated and one operated property in the first quarter of 2006. In response to current industry conditions of lower natural gas prices and higher capital and operating costs, the Company is reducing its 2006 capital budget from C$40 million to approximately C$30 million, and is suspending its previously announced 2006 exit production rate guidance. Current production is approximately 1,700 boe/d and 2006 full year volumes are now expected to average approximately 1,850 - 1,900 boe/d. The Company has approximately 1,000 boe/d of predominantly natural gas potential behind pipe which can be tied-in between now and early in the new year. Approximately 500 boe/d of these volumes relate to drilling success in the first quarter of 2006, which were not tied-in because the wells are in winter access only areas. Another approximately 500 boe/d relates to recent drilling success and includes both tested wells and one well where productive capacity is expected to be confirmed via testing within the next two weeks.
On a year-to-date basis, the Company has drilled 15 wells (11.4 net), resulting in 11 natural gas wells (8.9 net), 1 oil well (1.0 net), and 3 unsuccessful wells (1.5 net) for a total success rate of 80% (87% net).
Outlook and 2007 Budget
The Company will soon be entering an exciting phase of its corporate strategy as international exploration will become an emerging and more important focus. In Alaska, two or three exploration wells are planned to be drilled in the first half of 2007 and in the U.K. one or two high working interest exploration wells are planned to be drilled in the second half of 2007. It is anticipated that any success from the international exploration activity could result in material growth for the Company.
Bow Valley's Board of Directors has approved a budget of C$100 million for 2007. Included in this budget is capital spending of $55 million in the U.K. to complete the development programs at the Blane, Enoch and Chestnut fields and a significant portion of the development expenditures for the Ettrick field. In addition to the U.K. development budget there is another $20 million budgeted for U.K. exploration. In Canada, the Company has budgeted $15 million of exploration expense which is a reduced capital program designed to maintain the Canadian production profile. To supplement the Canadian capital program the Company will engage in an active program of farming out some of its exploration prospects to improve its overall return on capital. In Alaska, Bow Valley has budgeted $10 million for 2007 to pursue its previously announced joint venture exploration program to drill two exploration wells and acquire 3-D seismic. Management and the Board of Directors will monitor the results from each of its reporting jurisdictions with the possibility of increasing the 2007 capital budget.
The Blane and Enoch field developments continue towards first production within the next six months. These two fields will add productive capacity of approximately 4,050 boe/d (net) of high netback light oil. With Chestnut scheduled for first production in the second half of 2007 and the prospect of Ettrick coming on production in the second quarter of 2008, further strong growth in volumes is expected into 2008.