THE WOODLANDS, TX, July 30, 2012 /CNW/ - Porto Energy Corp., ("Porto" or the "Company") (TSXV: PEC), a company focused on oil and gas exploration, appraisal and development in Portugal, today announced its financial results for the three and nine month periods ended May 31, 2012. All amounts are stated in US dollars unless otherwise noted by C$ for Canadian dollars or € for Euros.
Selected Recent Highlights
- Completed processing of 1,100 km2 3-D seismic acquisition data over the Cabo Mondego-2 and São Pedro de Muel-2 concessions offshore Portugal;
- Received approval from the Portuguese oil and gas authority, Divisão para a Pesquisa e Exploração de Petróleo ("DPEP"), for a modified 2012 work program;
- Received updated independent resource evaluation from Dallas, Texas-based Netherland, Sewell & Associates, Inc. ("NSAI");
- Concluded a definitive agreement with Sorgenia International B.V., Netherlands ("Sorgenia"), and Rohöl-Aufsuchungs Aktiengesellschaft, Austria ("RAG") to jointly evaluate the unconventional resource potential of the Lower Jurassic (Lias) stratigraphic interval within a portion of Porto's concessions in Portugal;
- Secured a 100% working interest in two new concessions onshore Portugal, increasing the Company's best estimate P50 risked prospective resources by approximately 72.0 mmboe giving the Company a total of approximately 484 mmboe best estimate P50 risked prospective resources based on NSAI's independent assessment and supplement to their report dated March 23, 2012 with an effective date of March 31, 2012;
- Subsequent to quarter end, entered into a definitive farmout agreement, through its wholly-owned subsidiary Mohave Oil and Gas Corporation, with Petróleos de Portugal - Petrogal ("Galp"). Galp will pay the Company approximately US$7.8 million to earn 50% of the Company's rights in the Aljuabarrota-3 concession, comprising approximately 300,000 acres, onshore Portugal; and
- Subsequent to quarter end, entered into a new drilling contract with KCA Deutag, securing the rig on a single well basis with an option on subsequent wells.
"We have recently advanced multiple JV initiatives allowing us to derive value from our broad asset base and prepare for drilling of our core pre-salt prospect," said Joseph Ash, President and CEO of Porto. "We also continue to add to our asset base securing two additional concessions with unconventional potential that we intend to evaluate in conjunction with our partners."
Financial Review
Three months ended May 31, 2012 as compared to the three months ended May 31, 2011
Revenues
Revenue during the three months ended May 31, 2012, was $1,604 compared with $24,056 for the corresponding period ended May 31, 2011. Revenue during the nine months ended May 31, 2012, was $15,785 compared with $30,187 for the corresponding nine month period ended May 31, 2011. Revenue is composed primarily of interest income from cash on hand. Since the Company has not yet established commercial oil and gas production from its Concessions, its sources of revenue are not of a recurring consistent nature.
General and Administrative Expense ("G&A")
G&A expense decreased by $453,373 from $1,503,415 for the three months ended May 31, 2011 to $1,050,042 for the corresponding period in 2012. G&A expense decreased by $125,921 from $3,694,729 for the nine months ended May 31, 2011 to $3,568,808 for the corresponding nine months in 2012. The decrease in G&A expense for the three and nine month periods ended May 31, 2012 was primarily a result of decreased salaries and wages, professional fees, and lower office expenses, partially offset by increased consulting fees and insurance costs. The nine months ended May 31, 2011, includes a one-time charge of $246,622 in severance payments to former employees. This decrease is a result of reduced corporate and operational activity at the Company compared to the prior year period.
Share-based Compensation
Share-based compensation for the three months ended May 31, 2012 was $376,650 compared with $910,866 for the three months ended May 31, 2011. Share-based payments expense for the nine months ended May 31, 2012 was $1,371,681 compared with $1,843,532 for the nine months ended May 31, 2011. During the year ended August 31, 2011, a total of 11,600,000 options to acquire shares of common stock were issued to officers, directors and employees in accordance with the Company's long-term incentive plan and subject to vesting requirements and 1,548,208 options expired due to employment terminations. In December 2011, the Company granted options to acquire up to 3,110,000 Common Shares of Porto, of which 2,110,000 were granted to directors and officers of Porto. Each grant of options is for a five year term, expiring on December 14, 2016. The options vest over two years (one-half immediately and one-half on the first anniversary of the grant date). The options are exercisable at a price of
.105 per Common Share. There are now options outstanding to purchase a total of 14,660,000 Common Shares of Porto.
Finance Expense
Finance expense for the three months ended May 31, 2012, was $111 compared with $8,103 for the comparative period in 2011. Finance expense for the nine months ended May 31, 2012, was $520 compared with $9,288 for the comparative period in 2011. Finance expense primarily includes the non-cash accretion of decommissioning obligations for future abandonment costs for wells previously drilled in Portugal during the period. Interest expense for 2011 also reflects interest accrued on outstanding payables.
Foreign Currency Translation
Foreign currency translation losses for the three months ended May 31, 2012, were $73,918 in comparison to translation gains of $228,431 in the comparative period for 2011. Foreign currency translation losses for the nine months ended May 31, 2012, were $10,336 in comparison to translation gains of $290,242 in the comparative period for 2011. The foreign currency unrealized gains and losses reflect the changing value of the Canadian dollar and Euro versus the US dollar, in which the Company maintains its accounts, at the respective period ends.
Depreciation
Depreciation expense of $9,053 was recorded during the three months ended May 31, 2012, compared with $8,561 during the comparative period in 2011. Depreciation expense of $27,779 was recorded during the nine months ended May 31, 2012, compared with $15,354 during the comparative period in 2011. These amounts are largely due to the depreciation of furniture and fixtures.
Impairment on Exploration and Evaluation Assets
No impairment was recorded for the three months ended May 31, 2012 as a result of the impairment review on the carrying value of the exploration and evaluation assets as of May 31, 2012. An impairment of $23,594,000 was recorded for the nine months ended May 31, 2012, as a result of the impairment review on the carrying value of the exploration and evaluation assets as of February 29, 2012. The impairment review was conducted by comparing the carrying value of the Carbonates cash generating unit assets to the estimated recoverable amount of these assets using value in use. Value in use is determined based on a third-party evaluation report of our resources using a discount rate of 16% which approximates the weighted average cost of capital for the Company as well as taking into consideration current market conditions.
Net Loss Before Income Taxes and Gain on Settlement of Debt
The Company recorded net losses for the three months ended May 31, 2012 of $1,508,170, compared with $2,178,458 for the comparative period in 2011. The Company recorded net losses for the nine months ended May 31, 2012 of $28,557,339, compared with $5,242,474 for the comparative period in 2011. As the Company is in the exploration phase of operations, there are currently no oil and natural gas producing properties generating revenues. The Company's net losses for these periods were additionally impacted by G&A expenses including salaries, office costs and travel costs in addition to professional fees and share-based payments. The fair value of the share-based payments was a non-cash expense in these periods.
Income Taxes
The Company recorded a net income tax benefit of $42,581 on a net loss before income tax of $1,508,170 for the three months ended May 31, 2012. During the corresponding period ended May 31, 2011, the Company recorded net income tax expense of $63,910, on a net loss before income tax of $2,178,458. The Company recorded a net income tax expense of $21,966 on a net loss before income tax of $28,557,338 for the nine months ended May 31, 2012. During the corresponding period ended May 31, 2011, the Company recorded net income tax expense of $1,463,653, on a net loss before income tax of $5,242,474. The difference between the effective tax rate recognized and the blended statutory rates of the various taxing jurisdictions in which the Company operates is primarily due to the application of a valuation allowance for the full amount of its gross future tax asset as it believes, based on the weight of available evidence, that it is more likely than not that the future tax asset will not be realized prior to the expiration of net operating loss carryforwards in various amounts at 2028 through 2031. Net operating loss carryforwards as of May 31, 2012 were approximately $26.6 million.
Gain on Settlement of Debt Expense
The Company did not record any gain on the settlement of debt for the three and nine months ended May 31, 2012 compared to a gain of $469,279 for the three and nine months ended May 31, 2011. During the third quarter ended May 31, 2011, under the terms of the debt settlement agreement of December 2009, the anti-dilution rights, including the right to put 1,400,000 common shares of the Company for $450,000, were terminated. As a result, the Company recorded a gain on the settlement of debt of $469,279 after translation adjustments. The prior period gain was a result of settling outstanding accounts payable and accrued liabilities at discounts to the recorded value through the payment of cash and the issuance of stock in the prior period when the Company was in the process of implementing its reorganization.
Comprehensive Income (Loss)
The Company recorded a comprehensive loss for the three months ended May 31, 2012 of $1,465,589, compared with a comprehensive loss of $2,242,368 for the three months ended May 31, 2011. The Company recorded a comprehensive loss for the nine months ended May 31, 2012 of $28,579,305, compared with a comprehensive loss of $6,236,848 for the nine months ended May 31, 2011. The difference between net loss and comprehensive loss is comprised of the non-recurring gain on the settlement of debt and the provisions for income taxes.
Operational Review and Outlook
Drilling Results
Torres Vedras-3 (97.5% working interest)
The SPC-2, the second well in the Company's program to explore the Jurassic Reef prospect, was spud on August 19, 2011 and reached total measured depth at 1,957 meters on September 9, 2011. The SPC-2 targeted a well defined four way closure trap in the Jurassic Reef as delineated by the Company's 120 km2 3-D seismic survey of this area. The well had live and dead oil shows while drilling and good reservoir properties in several limestone and dolomite intervals. A porous interval of dolomite from 1,625 meters to 1,679 meters indicated pay on a petrophysical evaluation of the open hole logs, however, analysis of sidewall cores taken over the interval and additional log evaluation was required to determine if the logged pay over this interval was commercial. Following completion of the analysis of the gathered data the Company determined that the well was gas charged but the presence of a significant amount of carbon dioxide would make it uneconomic to produce. On that basis, the Company elected to plug and abandon the well. Following this result the Company now expects to take time to evaluate the wide array of information gathered on this prospect before making a decision with respect to next steps of its reef exploration program on the western portion of the Torres Vedras concession. Any future focus will likely shift to reef complexes identified by the 240 km2 Montejunto 3-D seismic acquisition along the western part of the Torres Vedras concession.
Aljubarrota-4 (100% working interest)
The Company commenced re-entry operations on the well on the Aljubarrota-3 concession in central Portugal in May 2011. The well was originally drilled in 2005 to a depth of 2,110 meters as a direct offset to the Company's Alj-2 well that discovered 366 BCF of contingent gas resources in a Jurassic fractured Brenha carbonate formation where it was temporarily abandoned above the gas accumulation due to operational constraints. The Company deepened the well by 450 meters to approximately 2,550 meters and recovered approximately 65.0 meters of conventional core and approximately 430 meters of open hole logs in the Jurassic Brenha gas reservoir. Drilling operations, including acquisition of 60-70 meters of conventional core, took approximately one month. Upon completing the core analysis and concluding initial drilling operations on the SPC-1 and SPC-2 wells in September 2011, the Company then again re-entered the well. The well encountered promising reservoir properties and gas shows. However, it was not able to sustain economic production levels due to water encroachment and, therefore, the Company elected to plug and abandon the well. The water had high concentrations of salt, approximately 175 thousand parts-per-million, indicating the origin of the water encroachment is most likely the salt pack below the bottom of the well and is being introduced by a nearby fault that is approximately 300 meters away. The re-entry encountered normal pressures as well as fractured and matrix porosity identified in the core analysis of the bottom ten meters of the Basal Brenha interval above 2.0%, which is similar when compared to analogous wells. This porosity, however, is also the mechanism that is allowing water to penetrate into the fractures and ultimately is preventing sustained gas production. As a result, more interpretation and analysis is required to further the Company's understanding of the play and the basin in general to see if it can mitigate the risk profile and identify a suitable location for a commercially viable well. Management estimates that the lack of commercial gas rates will reduce the P50 contingent gas resources assigned to the Basal Brenha by approximately 80 billion cubic feet ("BCF"). However, management estimates that the play still has approximately 270 BCF of P50 contingent gas resources remaining in the Upper Brenha and additional resources in the Basal Brenha if the water coming up the fault near the ALJ-2 and wells can be eliminated. Additional work will be performed to understand this tight gas play in order to commercialize the contingent resources.
Prior to the completion of the Basal Brenha, the Company confirmed that the Upper Brenha tight gas section is water free but wellbore limitations prevented completion of this interval.
Seismic Acquisition & Aeromagnetic Survey Results
Cabo Mondego-2 and São Pedro de Muel-2 (100% working interest)
In early September 2011, the Company completed the acquisition of 1,100 km2 of 3-D seismic data over portions of the Cabo Mondego-2 and São Pedro de Muel-2 concessions offshore Portugal using towed streamer arrays. The seismic acquisition covered the Monte Real Platform Trend which is expected to define exploration well locations in an attempt to attract JV partners. Processing of the data is now complete and preliminary interpretation has confirmed the prospects the Company has already identified from previous 2-D analysis as well as several new potential prospects.
Basin-wide Aeromagnetic Survey
The Company completed a 24,000 km2 aeromagnetic data survey in July 2011 and processing was completed in December 2011. The survey is helping management to delineate the boundaries of the Lusitanian Basin, inferring the location of the thickest sedimentary section in order to further the Company's understanding of the regional geology and focus exploration efforts economically.
Torres Vedras-3 (97.5% working interest)
In June 2011, the Company began shooting a 240 km² 3-D seismic program over the Montejunto Anticline on the Torres Vedras-3 Concession. The program targeted the Shallow Jurassic Carbonate, Jurassic Reefs and Presalt Silves and is designed to high-grade prospects, further evaluate the Jurassic Reef Trend and seal potential and define locations for future wells. Acquisition was completed in January 2012. The data from the Montejunto seismic program will be processed and interpreted with results expected by late 2012. The Company intends to use the data from this program, as well as data from the July 2011 aeromagnetic data survey, to identify drill sites targeting multiple stacked pay intervals including Jurassic Reefs on the western side of the basin, the Presalt, as well as additional shallower targets.
This fourth and final 3-D program has, in total, given the Company more than 1,600 km2 of new data on its concessions and with its completion, fulfilled its seismic obligation under its work program commitments to the Portuguese government. At this time, the Company does not intend to acquire additional seismic.
Current Activities
Presalt Prospect (100% working interest)
Using the recently completed pre-stack time migration processing from the 160 km2 Aljubarrota 3-D seismic survey completed in 2011, a large Triassic four-way closure has been identified within the Presalt sandstones beneath the gas charged Lower Jurassic Brenha Formation. The crest of this structure is estimated to be 800 metres up dip of gas shows within the Triassic sandstones in the Company's Brenha gas discovery. The entire prospect and surrounding area appears to have a thick salt top seal imaged from the seismic data set. The most optimum drilling location has been identified and the drill site has been secured in anticipation of recommencing drilling operations. Additional shallower targets have also been identified within the mapped four-way closure. As part of the JV with Galp, the Company intends to mobilize the KCA Deutag drilling GmbH ("Deutag") rig, currently stacked at the Company's storage facility, and spud a Presalt well with a target depth of approximately 3,000 metres in late August 2012.
Joint Venture Agreement
In February 2012, the Company entered into a definitive joint venture agreement with Sorgenia and Rag, (together the ("Farm-in Partners"), to jointly evaluate the unconventional resource potential of the Lower Jurassic (Lias) stratigraphic interval within Porto's concessions in Portugal. Porto will retain operatorship of the Company's concessions and the joint venture. The area to be jointly evaluated is approximately 450,000 acres. The Lias stratigraphic interval is being pursued as an unconventional resource throughout Europe.
Under the terms of the agreement, Sorgenia and RAG will each initially secure a 32.33% working interest specifically in the Lias stratagraphic interval in exchange for their participation in the first phase of a three phased work program. Porto will not be required to fund the joint venture until the third phase unless phase one and two encounter cost overruns as discussed below. The first phase, which began in July 2012, involves the drilling of 19 shallow wells testing the Lias and must be completed by December 31, 2012. This program is focused on developing a comprehensive geophysical and geochemical analysis of the Lias stratagraphic interval. The Farm-in Partners will each fund 50% of the overall costs of the first phase work program with total program costs not to exceed US$1.0 million. The second phase will begin immediately following the first and must be completed by August 1, 2014, but is subject to extension. Upon entry into the second phase, the Farm-in Partners will each be deemed to have earned a 32.33% interest in the Lias stratagraphic interval. Second phase activities include the drilling of two deep wells and additional geochemical and geophysical analysis. The costs associated with the two wells will be shared equally between the Farm-in Partners capped at a gross cost of US$10.0 million, net of mobilization and demobilization costs. Other costs associated with the phase two work program will be shared according to the working interest held by each of the parties. Activities under the phase three work program, which is expected to begin immediately following completion of the phase two work program, include the submission of a five-year general development and production plan with further development and production initiatives to follow as necessary. The costs for the third phase work program will be borne by all parties according to their working interest in the JV.
Zambujal and Peniche Concessions
In May 2012, the Company secured a 100% working interest in two new concessions, onshore Portugal. The Zambujal and Peniche concessions cover approximately 315,000 and 96,000 acres, respectively. The terms of the concessions provide for an initial exploration period of eight years that expire May 21, 2020. The entire area of each concession is being evaluated by the Porto, Sorgenia and RAG JV as an unconventional oil and gas resource. The addition of these two new concession increases the Company's best estimate P50 risked prospective resources by approximately 28.6 mmboe giving the Company a total of approximately 484 mmboe best estimate P50 risked prospective resources based on NSAI's independent assessment and supplement to their report dated March 23, 2012 with an effective date of March 31, 2012.
Farmout Agreement
In June 2012, the Company entered into a definitive farmout agreement (the "Agreement") with Galp. Galp will pay the Company $7.8 million to earn 50% of the Company's rights on the Aljuabarrota-3 concession, comprising approximately 300,000 acres, onshore Portugal. Under the terms of the Agreement, Galp will acquire a 50% participating interest in exchange for payment of 50% of Porto's sunk costs in the Aljubarrota-3 concession totaling approximately $4.3 million and payment of their participating interest share (50%) of costs from and after the effective date of the Agreement. The payment of the $4.3 million is subject to conditions precedent, which requires that the assignment of interest is to be approved by the Portuguese oil and gas authority, Divisão para a Pesquisa e Exploração de Petróleo ("DPEP").
Under the JV the Company intends to drill a Presalt well, the Alcobaça #1 ("ALC-1"), in the Alubarrota-3 concession with total expected well costs of approximately $7.0 million. The well has a target depth of approximately 3,000 meters with drilling expected to commence in late August and to take approximately 45-55 days to complete.
Following the drilling and testing of the ALC-1, Galp has the option to acquire a 25% working interest in each of the Company's other concessions in exchange for payments totaling no more than 25% of Porto's sunk costs in each concession. The Company will remain the operator through the drilling of the ALC-1 well, after which Galp will have the option to become the concession operator.
Drilling Contract Agreement
In July 2012, the Company entered into a new definitive agreement with Deutag to secure the drilling rig currently stacked at Porto's facilities following the expiration of the initial drilling contract between the parties. Under the terms of the contract, Porto is securing the rig on a single well basis with an option on subsequent wells.
Letter of Intent
In March 2012, the Company signed a non-binding Letter of Intent ("LOI") with an undisclosed party, (the "Partner"), whereby the Partner would farm in to Porto's rights on certain of the Company's concessions onshore Portugal, including the Presalt potential on the Aljubarrota-3 concession. Under the terms of the LOI, the Partner was to earn a 50% interest in the concessions, comprising approximately 600,000 gross acres (300,000 net to the Partner), in exchange for an aggregate farm-in commitment of up to US$23.0 million in payments and carried costs. In May 2012, the LOI was allowed to expire due to lack of funding.
Drilling Outlook
2012 Work Program
The Company received approval from the DPEP, for its modified 2012 work program in May 2012. However, following the drilling results in the reef wells as well as the re-entry well, and based on the timing of the interpretation of the recently completed Montejunto 3-D seismic data acquisition, the Company and DPEP agreed to modify the Porto work program commitments going forward, with a near term focus on the evaluation of the Lias stratigraphic interval, which Porto has identified as an unconventional resource throughout its concessions. Under the 2012 work program, the Company will drill 19 shallow wells testing the Lias and two additional deep wells targeting the Presalt and possibly the Aljubarrota gas discovery. All 19 Lias wells are being undertaken as part of the JV with Sorgenia and RAG, for which they will carry Porto. The two deep wells include a Presalt well, the ALC-1 and, depending on the results of that initial well, the Alj-5 well to further evaluate the Aljubarrota gas discovery. The total cost for these wells is expected to be approximately US$14.0 million and are anticipated being funded, in part, by joint venturing efforts. Receipt of the approval from the DPEP ensures that Porto will remain in good standing with the government and will be able to meet its obligations under the concession agreements.
The Company has discovered reservoir, porosity and permeability throughout the basin. It is now in search of geologic traps that provide improved chances of finding hydrocarbons.
To view the Company's Quarter Ended May 31, 2012 Consolidated Financial Statements, related Notes to Consolidated Financial Statements, and Management's Discussion and Analysis, please see the Company's interim filings which will be available on www.sedar.com and at www.portoenergy.com.
About Porto Energy Corp.
Porto Energy Corp. is an international oil and gas company engaged in the exploration of crude oil and natural gas in Portugal, including the appraisal of a gas discovery. Through its wholly owned subsidiary, Mohave Oil And Gas Corporation (a Texas corporation with branch offices in Portugal), the Company holds working interests in five concessions in Portugal's Lusitanian Basin totaling 1,444,152 net acres or 5,844 km2. Through its exploration efforts to date, the Company has identified seven major exploration trends over its concessions and generated more than 45 prospects and leads. Porto Energy's shares trade on the TSX Venture Exchange under the ticker symbol "PEC". For more information on Porto Energy visit www.portoenergy.com.
Cautionary Statements
No proved, probable or possible reserves have been assigned by the Company at this time. Undiscovered resources are those quantities of oil and gas estimated on a given date to be contained in accumulations yet to be discovered. Estimates of resources always involve uncertainty, and the degree of uncertainty can vary widely between accumulations/projects and over the life of a project. There is no certainty that it will be commercially viable to produce any portion of the resources.
Estimates with respect to resources that may be developed and produced in the future are often based upon volumetric calculations, probabilistic methods and upon analogy to similar types of resources, rather than upon actual production history. Estimates based on these methods generally are less reliable than those based on actual production history. Subsequent evaluation of the same resources based upon production history will result in variations, which may be material, in the estimated resources. Resource estimates may require revision based on actual production experience.
Prospective resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects.
Best Estimate is considered to be the best estimate of the quantity that will actually be recovered. It is equally likely that the actual remaining quantities recovered will be greater or less than the best estimate. Using probabilistic methods, there should be at least a 50 percent probability (P50) that the quantities actually recovered will equal or exceed the best estimate.
This press release contains certain forward-looking statements. These statements relate to future events or the Company's future performance. All statements other than statements of historical fact are forward-looking statements. The use of any of the words "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "should", "believe", "predict" and "potential" and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. No assurance can be given that these expectations will prove to be correct and such forward-looking statements should not be unduly relied upon. These forward-looking statements are made as of the date of this press release and the Company does not undertake to update any forward-looking statements that are contained in this press release, except in accordance with applicable securities laws.
Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.
SOURCE: Porto Energy Corp.