Petromagdalena Energy (fka ALNGF)

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Petromagdalena Announces Farm Out of Santa Cruz and US$10/bbl Improvement in Oil Marketing Agreement at Cubiro

TORONTO, Aug. 25, 2011 /CNW/ - PetroMagdalena Energy Corp. (TSXV: PMD) announced today that it has signed a letter of intent to farm out 30% of the Santa Cruz Block, in which the Company holds a 100% working interest, for a carry of 60% of the first exploratory well to be drilled on the block and 45% of the second exploratory well. The Santa Cruz Block is located in the Catatumbo Basin in Colombia and neighbours the producing Rio Zulia field. The Company expects to have its environmental permit shortly and to commence drilling of the first exploratory well, estimated to cost approximately US$15 million, in the fourth quarter this year. PetroMagdalena will retain a 70% working interest in the block and remain as operator.

Commenting on the farm-out agreement, Luciano Biondi, the Company's Chief Executive Officer stated, "We are very pleased to announce this farm out agreement as it diversifies our exploration risk, maintains our upside opportunity from a new discovery and frees up approximately US$8-9 million of funding in this year's budget which had been allocated to Santa Cruz. Consistent with our strategic focus on our core oil assets, we will invest these funds in the expanded work program at Cubiro following the Petirojo discovery announced on Monday, including a development well and an exploration well in Cubiro Block B in addition to accelerating the workover candidates at Cubiro."
The Company also announced that it is continuing to take steps to improve the netbacks from its operations at Cubiro. Earlier this year, the Company announced that it had implemented an improved marketing contract with Pacific Rubiales Energy Corp. to deliver its oil from Cubiro through multiple delivery points to the existing Colombian pipeline infrastructure. Initially, oil deliveries were directed to the Rubiales field with the Company's selling price based on a formula that resulted in it receiving, on average, WTI minus $7/bbl. Commencing in July 2011, the Company is now delivering 100% of its oil under the marketing agreement with Pacific Rubiales to Guaduas due to the high quality of its oil from Cubiro, which is now sold as Vasconia, resulting in an improved selling price compared with WTI. Vasconia has increased against WTI over the past year and is actually selling today at US$19/bbl over WTI. The Company's oil sales for the month of July were equivalent to WTI plus US$10/bbl using Vasconia as the benchmark. This is a US$17/bbl improvement in oil selling price versus the previous arrangement. With transportation costs approximately US$7/bbl higher to deliver through Guaduas, the net improvement in the netback structure in the oil marketing agreement is approximately US$10/bbl. The Company continues to evaluate additional opportunities to improve its netbacks through price enhancement and cost reductions.