Unconventional Oil

[johnlw]

Synenco Energy looks into other business options

2007-05-01 07:08 ET - News Release

Mr. Scott Ranson reports

SYNENCO ENERGY INITIATES REVIEW OF OPTIONS TO MAXIMIZE SHAREHOLDER VALUE

Synenco Energy Inc. plans to assess options for a strategic repositioning of the company. The plan has a range of possible outcomes including: restructuring the Northern Lights Partnership's downstream business to capture economies of scale by including other partners, alternative downstream commercial ventures, and other corporate-level options that enhance shareholder value.

Synenco Energy today also released an updated capital cost estimate of $6.3-billion for the downstream (upgrader) portion of the Northern Lights oil sands project planned for Sturgeon county, Alberta.

The upgrader capital cost estimate is based on a thorough examination by the company of a wide range of design and technology options, including coker and hydroprocessing technologies. The upgrader estimates range from $4.4-billion to $6.3-billion, while the real internal rates of return range from 8.5 per cent to 9.5 per cent (based on a long-term oil price assumption of $55 (U.S.) per barrel). The option with the highest capital cost, which includes gasification, produces the greatest real rate of return. However, Synenco's management and board of directors have determined that the expected rates of return for any of the examined upgrader options are incompatible with Synenco's weighted average cost of capital, which is higher.

"We have world-class assets in our Northern Lights resource and, as operator, our outstanding and experienced work force," said Synenco chairman and chief executive officer, Mike Supple. "We remain very optimistic about the long-term potential of these assets and are committed to maximizing the shareholder value inherent in them. At the same time, however, we recognize that our current path needs to be adjusted to achieve this goal."

"The fundamentals of a capital-intensive business are straightforward," said president and chief operating officer, Todd Newton. "Every company has a cost of capital, and value is created when the company invests its capital in assets that provide a return that exceeds this cost of capital. Synenco Energy's cost of capital is greater than that of more established companies, which are producing operating cash flow, and our investment criteria will naturally be higher as well. We will review all options including those that reduce our cost of capital or increase project returns."

In conjunction with the announced options review and downstream capital cost guidance, Synenco Energy is also updating other previously disclosed guidance pending the outcome of the options review:

* The development schedule for Northern Lights, announced in December, 2006, and which anticipated first oil by mid-2011, is retracted.
* The company's 2007 cash expenditure level is estimated to be approximately $100-million after reprioritization of Northern Lights and corporate activities. The previously announced 2007 cash expenditure budget was $235-million.

"The combination of our strong cash position of more than $300-million, oil sands lease expiration dates that are more than a decade away, and our low level of contractual commitments support the timing of today's decision to formally seek and assess all available alternatives," said Mr. Newton.

Design and engineering activities in support of the Northern Lights upgrader will be put on hold during the assessment period and Synenco will meet with Alberta regulators to discuss how best to implement a time out in their regulatory reviews for the upgrader application while strategic options for the company are being assessed.

Work in support of Northern Lights upstream development will be reprioritized to initiatives that reduce execution and operational risk. These initiatives include progressing the Northern Lights mining and extraction application, which is now well into the regulatory review process; mine planning; and the pilot testing of extraction technology. The company also will continue to develop its overseas modularized construction strategy for Upstream.

TD Securities Inc. and Merrill Lynch Canada Inc. have been retained as financial advisers to Synenco as the company conducts its options review. There can be no assurances that any transaction will occur or, if one is undertaken, its terms or timing. Synenco Energy does not expect to update its progress or disclose developments with respect to the exploration of options until the board of directors authorizes any transaction or when required by law.

We seek Safe Harbor.