Mahalo Energy Ltd.
TSX: CBM
November 14, 2006
Mahalo Energy Ltd. Announces Third Quarter 2006 Results
Mahalo Energy Ltd. is pleased to announce its financial and operating results for the three months ended September 30, 2006.
Nine Nine
Q3 Q2 Q1 Months Months
2006 2006 2006 2006 2005
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Financial
Highlights
(dollars, except
shares)
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Petroleum and
natural gas
revenue 11,578,425 8,713,886 8,391,677 28,683,988 5,232,219
Operating
netback (1) 5,612,467 4,532,436 4,838,881 14,983,784 3,383,130
Funds from
operations (1) 3,434,650 3,954,636 4,015,200 11,404,484 2,441,748
Per share -
basic &
diluted (1) 0.06 0.08 0.10 0.23 0.09
Net income
(loss) (796,744) (801,741) 544,306 (1,054,179) (1,741,204)
Per share -
basic &
diluted (0.01) (0.02) 0.01 (0.02) (0.07)
Capital
expenditures 20,780,749 13,644,985 20,894,689 55,320,423 13,935,418
Corporate and
property
acquisitions
(2) - 80,755,943 11,061,786 91,817,729 26,696,406
Proceeds from
sale of oil
and gas assets 17,003,908 - - 17,003,908 -
Long-term debt,
end of period 43,973,542 33,586,692 20,990,003 43,973,542 -
Common shares,
end of period 58,286,035 58,286,035 43,132,405 58,286,035 40,582,770
Weighted
average
- basic 58,286,035 48,128,107 42,941,423 49,841,396 26,390,828
Weighted
average
- diluted 58,286,035 48,128,107 44,013,115 49,841,396 26,390,828
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Operating
Highlights
(dollars, except
volumes)
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Average daily
sales volumes
Natural gas
(mcf/day) 14,861 12,799 10,125 12,612 2,229
Crude oil
& NGL's (bbl/day) 463 161 - 209 -
Barrels of oil
equivalent
(boe/day) 2,939 2,294 1,688 2,312 372
Average selling
price
Natural gas
($/mcf) 6.35 6.63 9.21 7.20 8.60
Crude oil
& NGL's (bbl/day) 68.18 67.68 - 68.05 -
Barrels of oil
equivalent ($/boe) 42.82 41.74 55.25 45.45 51.59
Operating
netback ($/boe) (1) 20.76 21.71 31.85 23.74 33.36
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(1) The terms "funds from operations", "funds from operations per share",
"operating netback" and "netback" are not recognized measures under
Canadian Generally Accepted Accounting Principles ("GAAP") and are
therefore referred to as non-GAAP financial measures. The Company
calculates funds from operations by taking net income (loss) and adding
back non-cash items including stock-based compensation expense,
depletion, depreciation and accretion expense, unrealized financial
derivative gains and losses, unrealized foreign exchange gains and
losses, amortization of deferred financing costs and future income tax
expense and recoveries. Operating netbacks are calculated by
subtracting royalties and operating and transportation costs from sales
revenues. Management believes that these non-GAAP measures are useful
supplemental measures to provide shareholders and potential investors
with additional information regarding the Company's liquidity,
operating performance and ability to generate funds to finance its
operations. The Company's method of calculating these measures may
differ from other companies and accordingly, they may not be
comparable to measures used by other companies. These measures should
not be construed as an alternative to net earnings, as determined in
accordance with GAAP, as an indication of the Company's performance.
(2) Corporate and property acquisitions, as presented above, includes the
deemed value of non-cash consideration.
MESSAGE TO SHAREHOLDERS
Q3 2006 Highlights
- Reported sales of $11.6 million, funds from operations of $3.4 million and a net loss of $0.8 million in a continued low gas price environment.
- Continued to drill high deliverability coal bed methane (CBM) wells in Oklahoma.
- Benefited from a full quarter of production from properties of Peregrine Energy Ltd., acquired in the prior quarter.
- Drilled 43 (16.9 net) unconventional wells in the quarter, ranging from vertical pilot wells to horizontal producers, including 35 (9.5 net) wells in Oklahoma and 8 (7.4 net) wells in Canada.
- Tied in a portion of new wells in Q3; tie-in work will continue on 9 wells in Oklahoma and 3 wells in Canada in Q4.
- Realized proceeds of $17.0 million from divesture of non-core, non-producing conventional resource assets.
- Exited third quarter with sales volumes of approximately 3,000 boe per day.
Overview
Mahalo is a company that is committed to a disciplined business plan while focusing on operational success. Our discipline of "staying the course" was particularly tested this quarter during a time of significant uncertainty caused by depressed natural gas prices and North American inventory level concerns.
Mahalo benefits significantly from having a large portfolio of drillable prospects that includes varying play types; coal bed methane in both Canada and the United States, shale gas in the United States and conventional oil and natural gas in Canada.
At the start of the calendar year, Mahalo generated a detailed drilling prospect portfolio which assesses and prioritizes its various play-type opportunities utilizing breakeven economics under differing commodity pricing scenarios. This analysis has proven extremely beneficial to identify, drill and develop economic prospects and allow Mahalo to continue its drilling program despite low gas prices.
Benefiting from the acquisition of Peregrine
Although Mahalo's acquisition of Peregrine was initially perceived by market makers as an off-strategy transaction, the benefits of this arrangement are already being realized. As expected, the disposition of Peregrine's non-core conventional assets has generated an attractive selling matrix. We are pleased to advise our shareholders that the on-going divesture program is matching our expectations. At the time of writing this message, Mahalo has generated almost $28 million from sales of non-core Peregrine assets. The assets sold include properties with generally higher operating costs as well as properties with shut in reserves.
We continue to attract strong offers for other mature, conventional production assets which came with this acquisition. Such sales are creating a funding mechanism, allowing Mahalo to continue with its unconventional drilling and development program, at a time when some of our peer companies are not able to do so.
Mahalo has also benefited from Peregrine management expertise, accounting and land systems, making Mahalo a stronger company.
Staying the course
During the third quarter, we continued to drill horizontal CBM locations utilizing our unique horizontal drilling technique that is resulting in strong daily gas rates and operating efficiencies. Our ability to stay within coal seams and develop both thinner and thick coals continues to improve.
Mahalo has, within this past quarter, seen gas deliverability rates from a number of Mahalo et al wells that have surpassed earlier expectations of 1 mmcf per day. In the United States, the Company has participated in wells that have rates that range from 1.5 mmcf per day to 2.0 mmcf per day.
The lessons learned from our aggressive CBM development over the last two years include the extreme importance of proper technical prospect assessment and the need for unwavering focus on effective cost control; exploiting coal is a "cost game".
The Company continues to proactively research the unconventional marketplace, especially in the United States, for operational ideas to further improve its CBM operating results. We are currently assessing different pumping techniques which will allow for longer pump run time and less reservoir turbulence, thereby reducing coal fines migration.
On the shale front, the Woodford, Caney, Barnett and Fayetteville Shale's continue to attract considerable attention in the United States; Mahalo has a strong Woodford and Caney shale land position. Shale represents a tremendously large resource; successful exploitation can involve a significant funding challenge. The Company is hopeful that it will develop financially attractive partnership arrangements to allow for inclusion of some shale gas drilling and development in its 2007 budget.
In the interim, Mahalo is actively interpreting a previously acquired 80 square mile 3-D seismic shoot on its prospective shale acreage at Lakeview, Oklahoma and has committed to a large, 13 section 3-D seismic shoot across its Island, Oklahoma lands. This seismic will support location selection and eliminate fault intersecting. We also continue to search for and evaluate various drilling, development and completion techniques. Different stimulation techniques are also being evaluated; we are confident that identification of a cost and production efficient stimulation program is on the near horizon.
Operational update
United States:
As identified in Mahalo's break even economics, the majority of drilling has been focused on the Oklahoma CBM assets as a result of the current soft gas price environment. Proceeds from non-conventional asset sales have been utilized in two of our three major CBM areas, Poteau and Lakeview.
Oklahoma - Poteau
During the third quarter, Mahalo drilled and connected 3 (1.9 net) horizontal CBM wells in the Poteau field. Both wells were part of the infill program which will down space the Hartshorne coal to 6 wells per section. Both wells have demonstrated the stronger and flatter production profile associated with all of the infill wells drilled to date. In addition to the drilling, new mapping and reservoir engineering has provided an increase in our gas-in-place estimate as a result of the identification of a shale coal sequence that is contributing to our production.
Oklahoma - Lakeview
In the Lakeview area, Mahalo vastly expanded its CBM drilling with Williams Production Mid-Continent Company, as well as numerous other partners, and participated in 17 (4.5 net) horizontal CBM wells with significantly better than expected results. Three of the wells came on stream at greater than 1.0 mmcf per day, with one producing more than 2.0 mmcf per day.
Mahalo's 2006 Lakeview drilling program has achieved an average initial production rate of 775 mcf per day which is significantly higher than area averages. We attribute this to our ability to stay in the thinner coals that have demonstrated significantly better permeability than thicker coals and sands, while still having significant gas in place. Mahalo has currently identified more than 40 CBM locations in Lakeview for our 2007 drilling program.
Mahalo has also been actively interpreting an 80 square mile 3-D seismic shoot over the Caney and Woodford shale. Significant structural activity has been identified, and we believe that this data will significantly advance our shale program. In addition to this data, there have been many new developments in Woodford shale completion techniques in horizontal wells, and initial production rates of greater than 4.0 mmcf per day have been observed in offsetting lands to Mahalo's shale acreage.
Oklahoma - Island
Although Mahalo did not drill any new wells in the Island property in the third quarter, the focus was on facility optimization and the area is now ready to accept more volumes.
Mahalo et al has also decided to shoot a 13 section 3-D seismic survey across its high interest deep shale lands in the fourth quarter. This survey will be used to determine optimal co-ordinates for deep drilling locations.
Canada:
Corbett Creek
In our Corbett Creek field, we have continued to see gas rates incline, although operational issues with coal fines have constantly tested our production practices. Currently there are 6 wells on stream, with all wells in different phases of dewatering at present. Mahalo continues to apply significant back pressure to coals as gas comes in to avoid well bore collapse; however, offsetting wells continue to demonstrate average rates per horizontal leg of greater than 400 mcf per day. Mahalo's wells have demonstrated identical profiles to offsets.
Mahalo has received its holding application approval from the Alberta Energy and Utilities board and is now permitted to drill 4 Mannville wells per section across our holding.
Wizard Lake
Mahalo is very pleased to announce that a Mannville horizontal well drilled in its 100 per cent working interest Wizard Lake area has demonstrated very high permeability coal, as well as very encouraging productivity. The well is currently producing over 120 mcf per day with more than 400 PSI of back pressure being applied. The well has been on a steady incline since gas first showed, and continues to increase daily. Mahalo is planning to further delineate this play in 2007, and has more than 17 net sections of land to develop here.
New regulations on well spacing allow for 2 wells per section to be drilled across this entire area without need for holding application approval.
Outlook
The Company understands that the investment community has concerns regarding the economics of unconventional resource development. This is especially true during a time of low gas prices. The current weakness in gas prices is reducing cash flow generation for both conventional and unconventional gas producers. Many have elected to reduce or significantly curtail their natural gas drilling activity. At the same time, stockholders have reacted to low gas prices and disposed of or reduced their natural gas equity holdings, driving down share prices. Mahalo's share price has suffered the same fate. Sharply lower share prices generally result in an inability or unwillingness by most natural gas companies to access equity markets.
Aggressive drilling activity over the last few years has resulted in excess gas supplies and an inventory build-up; a slow down in such activity on the scale announced by many companies, including some of the majors, should help to bring North American natural gas levels back to a better supply/demand balance. A slowdown in drilling activity may also help to reduce drilling and other related costs which have risen rapidly of late.
In spite of the current situation, Mahalo remains committed to an ongoing, fiscally prudent CBM drilling, completion and tie in program as we move towards 2007. CBM assets typically have a longer production profile with significantly lower initial production decline than conventional gas assets. Furthermore, there are lead times associated with dewatering of coal seams prior to the realization of CBM production. As a result, underlying CBM economics may be less contingent on the current natural gas pricing environment.
With the benefit of cash generated through the sale of non-core conventional resource assets and our large inventory of economically viable unconventional prospects, even at today's gas prices, Mahalo is committed to maintain an appropriate level of CBM drilling momentum moving forward. We will continue to work diligently to ensure maximum spending flexibility, should gas prices not improve as anticipated.
Mahalo has always emphasized that coal is a "cost game". We believe that our approach to the unconventional resource is disciplined and we intend to maintain this discipline. We are confident in our understanding of CBM development and are working hard to better understand our shale gas opportunities. We remain highly confident in our ability to build a premium, profitable unconventional resource company for our shareholders.
Further information about our third quarter and year-to date results is set out in our Management's Discussion and Analysis for the three and nine months ended September 30, 2006.
Additional Information
Mahalo's unaudited consolidated financial statements and related managements' discussion and analysis for the three and nine months ended September 30, 2006 have been filed on SEDAR at www.sedar.com. For additional information on the Company, please go to the Company's profile on SEDAR or the Company's website at www.mahaloenergy.com
Mahalo is a junior, unconventional natural gas producer, focusing on the production and development of deeper Mannville coal bed methane deposits in western Canada and is successfully developing both coal bed methane and shale gas prospects in the United States, as well as conventional oil and gas in Canada.
Forward-looking Statements
Except for historical financial information contained herein, the matters discussed in this document may be considered forward-looking statements. Such statements include declarations regarding management's intent, belief or current expectations. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties; actual results could differ materially from those indicated by such forward-looking statements. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: (I) that the information is of a preliminary nature and may be subject to further adjustment, (ii) the possible unavailability of financing, (iii) risks related to the exploration and development of oil and gas properties, (iv) the impact of price fluctuations and the demand and pricing for oil and natural gas, (v) the seasonal nature of the business, (vi) start-up risks, (vii) general operating risks, (viii) dependence on third parties, (ix) changes in government regulation, (x) the effects of competition, (xi) dependence on senior management, (xii) impact of economic conditions, and (xiii) fluctuations in currency exchange rates and interest rates. Mahalo undertakes no obligation to update or revise any forward-looking statements, except as required by law.
The Toronto Stock Exchange has not reviewed and does not accept responsibility for the adequacy of accuracy of this press release.
CONTACT INFORMATION
Mahalo Energy Ltd.
Duncan Chisholm
President and Chief Executive Officer
(403) 716-3114
(403) 451-3501 (FAX)
or
Mahalo Energy Ltd.
540, 734 - 7th Avenue S.W.
Calgary, Alberta T2P 3P8
(403) 451-3500
(403) 451-3501 (FAX)
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