RE: blue mountainPosted on https://www.bme.ca on April 27th
The Stock
I was once told that you never apologize, but rather fix the situation. However, in this instance, I can not help but apologize to each shareholder, for the loss he/she has incurred with our Company in the last month. Exploration Companies hit bumps, and we hit ours. While we can take responsibility for a finding cost anomaly this year, or for stretching a bit too far on our wildcatting, we could do little to see the major disappointment on our 9-16 well at Spirit River. What has been equally surprising, is what we see as a severe market over reaction.
While we are always concerned about new production until it has some history to it, and while we were carefully monitoring the well because of this, we did not expect the well to effectively crater instantaneously if a problem arose, erasing nearly 700 BOED from our production over night. We were prepared to reduce production immediately, at the first sign of water production, and did so by shutting in the well for three days, the day after the very first sign of water. The well was placed back on production at less than half the rate, but the problem came back and continued to worsen. While we suggest that it is best to completely discount the well in your evaluation of the Company, we are still in fact assessing the problem. We are producing the well with pressure recorders down hole, so as to more accurately assess the build up pressure, to try to determine if it is the effect of the water aquifer, or the gas in place. After that assessment, which will take us to the middle of May, we will hopefully know whether the reserves are still there, and that the problem was in fact coning of water. If this is the case, we do have the option of either producing the well at even lower rates, or recompleting the initial discovery well farther away aerially, from the alleged cone in this well, as the Belloy has been produced from a twin well. However, if this route is taken, the well would be produced at very low rates to capture the reserves without coning. While this would re-establish our reserves, or at least a portion of the reserves, it would not replace the 670 BOED of production, as the well would be produced at 10 or 20% of that rate. This too will take time, as the well would have to be recompleted, and EUB approval obtained to produce it into our current blending scheme.
The market has treated this news with extreme consequence. The well represented approximately $0.40/ share in our net asset value, 2.6 BCF ( 433 thousand BOE) proven plus probable reserves of the 6.1 million BOE of year end reserves. The market took off two dollars. It is true that market valuations are more heavily weighted to production and cash flow these days, to which we have taken off about 18%. As a result, we are one of the few Companies trading around our net asset value, even after adjusting for the complete loss of reserves for the 9-16 well, which has yet to be established.
Drilling
Second quarter drilling is expected to commence in days, with a 25% WI development location on our Herronton Mannville prospect SW of Calgary. In June we hope to once again utilize one rig continuously in the Peace River Arch, drilling a Dunvegan test at Bilawchuk ( 0.5 net), a Dunvegan test at Spirit River ( 0.94 net), a Triassic test at Spirit River ( 0.33 net), and a Montney location at Worsley ( 0.95 net). In West Central Alberta, we will drill the first Cardium test on our Brazeau prospect (currently 94%, but partner interest is being evaluated). All of these locations will be classed as development wells. In addition to this, our agreements contemplate two prolific farmout wells to be drilled in June by major operators, at Hythe and Pouce Coupe, with Blue Mountain retaining a 40% interest. While the agreements contemplate June drilling, we can not be assured, that the operators will get it done in June, as surface problems often necessitate extensions. As well, a farmout well is contemplated by another operator on our Gordondale acreage. All three farmout locations are in the Peace River Arch.
Outlook
When things go sideways, it is natural to want to blame something or somebody, and certainly to be upset. It is important to note, that none of the current Directors, myself included, have ever since inception, cashed in a share, an option, or a performance warrant. While some management have seen it necessary to sell some stock on occasion in the past, for their own personal reasons, none have done so after the 9-16 well was placed on production.
When Blue Mountain was set up as a blind pool in 2002, it did not have a prospect, an acre of land, or even an office. Today the Company is producing 3000 BOED of production, has about 0.75 years debt to cash flow, has 140,000 acres of net undeveloped land (primarily in the Peace River Arch, the most sought after area in Alberta), has a huge inventory of drill ready prospects, of which we expect to drill between one third to one half this year, and six farmouts on its land, three of significant potential, where the Company retains a 40% interest from first production. We will continue to work hard to recapture the shareholders lost value, and we have the assets to work from, to do it.
I wish to thank the many solid shareholders who have offered their support and understanding through this difficult period. As well, we welcome the new shareholders who are recognizing the value in buying during this market reaction. As always I am available to take calls and emails from anyone with a question. I do my best to return every call or email as soon as I realistically can.
Yours truly
Randy Pawliw
President