Connacher's reserves increase 101% in 2007
Connacher Oil and Gas Ltd (C:CLL)
Shares Issued 210,240,232
Last Close 2/22/2008 $3.00
Monday February 25 2008 - News Release
Mr. Richard Gusella reports
CONNACHER REPORTS SIGNIFICANT INCREASES IN RESERVES AND 10% PRE-TAX PRESENT VALUE DURING 2007
Connacher Oil and Gas Ltd.'s reserve base and related 10-per-cent present value of future net revenue expanded significantly during 2007. The increase in bitumen reserves and resources at Great Divide and Halfway Creek reflects the completion of facilities at Great Divide Pod One and the effect of Connacher's first quarter 2007 core hole drilling program on its main lease block in the region. The increase in conventional reserves reflects successful drilling at Marten Creek, Alberta, also during first quarter 2007. Total 2P reserves (1P -- proved, 2P -- proved and probable, 3P -- proved, probable and possible) at year-end 2007 increased 101 per cent to 187.3 million barrels from 92.9 million barrels at Dec. 31, 2006. The 10-per-cent present value for these 2P reserves increased 126 per cent over Dec. 31, 2006, estimates from $529-million to $1.2-billion.
The estimates are as at Dec. 31, 2007, and do not include any of the results of Connacher's active and successful drilling program thus far during 2008. The full effect of this activity will be captured in a midyear 2008 update report, which will be prepared and reported upon after drilling results, core analysis and other information are fully assessed by the company and its independent evaluators, GLJ Petroleum Consultants of Calgary, Alta.
Comparative reserve volumes and values are presented on a year-over-year calendar basis, although the company did prepare a midyear report. There was no material change in total estimated reserve volumes compared with those estimated at midyear 2007; however, there is, for example, a 43-per-cent increase in the 10-per-cent present value assigned to Connacher's 2P reserves at Dec. 31, 2007, compared with the midyear estimates for this category. The increase reflects a higher price forecast at year-end 2007 and the expenditure of capital to complete Pod One facilities and wells prior to year-end 2007.
The reserve estimates provided herein were prepared by GLJ in a report with an effective date of Dec. 31, 2007. The GLJ 2007 report was prepared using assumptions and methodology guidelines outlined in the Canadian Oil and Gas Evaluation Handbook and in accordance with National Instrument 51-101. Comparisons provided herein with respect to Connacher's conventional and bitumen reserves, and resources are to estimates contained in a report prepared by GLJ with an effective date of Dec. 31, 2006. Future net revenue is calculated after deduction of forecast royalties, operating expenses, capital expenditures and abandonment costs but before corporate overhead or other indirect costs, including interest and income taxes. The GLJ 2007 report was prepared using the GLJ Jan. 1, 2008, price forecast, effective Dec. 31, 2007. The GLJ 2007 report does not consider the effect of the adoption of Alberta's new royalty regime in 2009 as the detailed regulations have yet to be released. The company does not believe the proposed Alberta royalty changes will have an unduly adverse effect on its reserve volumes or related present values, but it is anticipated that if the current proposals are adopted the effect will be negative.
Bitumen reserves
Connacher owns a 100-per-cent working interest in approximately 95,000 net acres of oil sands leases at its Great Divide project in northeastern Alberta, approximately 80 kilometres southwest of Fort McMurray and at Halfway Creek, Alberta. Numerous oil accumulations in the McMurray formation have been identified for development on the Great Divide leases, including Pod One, which contains over 20 metres of net steam-assisted gravity drainage (SAGD) pay and is now producing bitumen. The company has already applied to develop a similar 10,000-barrel-per-day (bbl/d) facility at Pod Two or Algar.
During 2007, Connacher's 1P bitumen reserves increased 21 per cent to 53 million barrels, after deduction of minor volumes of bitumen produced during December, 2007, at Pod One. Connacher's 2P bitumen reserves also increased 111 per cent to reach 178 million barrels, compared with 84 million barrels at year-end 2006. Proved, probable and possible (3P) bitumen reserves were estimated at 242 million barrels at year-end 2007, compared with 110 million barrels at Dec. 31, 2006, an increase of 120 per cent. These estimates do not include any of the results from 2008 drilling of core holes at Great Divide or at Halfway Creek, both in Alberta.
During 2007, GLJ was also able to continue its recognition of considerable additional contingent and prospective resources on the oil sands leases owned by Connacher. It should be noted that reserves, contingent resources and prospective resources involve different risks associated with achieving commerciality.
Contingent resources were assigned in regions with lower core hole drilling density than the reserve regions and are outside current areas of application for development. These resource estimates are not classified as reserves at this time, pending further reservoir delineation, project application, facility and reservoir design work. Contingent resources entail additional commercial risk than reserves which have not been included in the net present valuation. There is no certainty that it will be commercially viable to produce any portion of the contingent resources.
Prospective resources were assigned in unexplored regions of Connacher's acreage. Prospective resources entail additional commercial risk than reserves and contingent resources which have not been included in the net present valuation. There is no certainty that any portion of the prospective resources will be discovered. If discovered, there is no certainty that it will be commercially viable to produce any portion of the prospective resources.
Proved bitumen reserves (1P) and low estimate contingent resources were estimated at 114 million barrels; 2P bitumen reserves and best estimate contingent resources were estimated at 303 million barrels; 3P bitumen reserves and high-estimate contingent resources were estimated at 452 million barrels.
1P bitumen reserves and low-estimate contingent and prospective resources were estimated at 114 million barrels, the same as above, as no prospective resources are associated with 1P reserves. 2P bitumen reserves, and best-estimate contingent and prospective resources were estimated at 417 million barrels, and 3P bitumen reserves, and high-estimate contingent and prospective resources were estimated at 799 million barrels.
The GLJ 2007 report estimated Connacher's 1P bitumen reserves would generate $1-billion of future net revenue with a 10-per-cent present value of $492-million, after deduction of future capital requirements of $295-million and abandonment costs of $8-million.
2P bitumen reserves were forecast to generate $3.7-billion of future net revenue, with a 10-per-cent present value of $1.1-billion, after provisions for future capital of $1.1-billion and abandonment costs of $20-million.
3P bitumen reserves were forecast to generate $5.7-billion of future net revenue with a 10-per-cent present value of $1.2-billion, after provisions for future capital of $1.6-billion and abandonment costs of $31-million.
1P bitumen reserves plus low-estimate contingent resources were forecast to generate $1.9-billion, of future net revenue with a 10-per-cent present value of $634-million, after provisions for future capital of $981-million and abandonment costs of $18-million.
2P bitumen reserves and best-estimate contingent resources were forecast to generate $6.5-billion of future net revenue, with a 10-per-cent present value of $1.4-billion, after future provisions for future capital of $2.3-billion and $43-million of abandonment.
3P bitumen reserves plus high-estimate contingent resources were forecast to generate $10-billion of future net revenue, with a 10-per-cent present value of $1.9-billion, after provisions for future capital of $3.5-billion and abandonment costs of $65-million.
Economic runs for 1P bitumen reserves and low-estimate contingent and prospective resources are identical to 1P bitumen reserves plus low-estimate contingent resources, as no prospective resources were assigned in conjunction with 1P reserves.
2P bitumen reserves and best-estimate contingent and prospective resources were forecast to generate $9-billion of future net revenue, with a 10-per-cent present value of $1.8-billion, after provisions for future capital of $3.2-billion and abandonment costs of $58-million. Under this scenario, future annual production is forecast by GLJ to peak at 41,332 barrels per day in 2017.
3P bitumen reserves and high-estimate contingent and prospective resources were forecast to generate $18.8-billion of future net revenue, with a 10-per-cent present value of $2.6-billion after provisions for future capital of $6.7-billion and abandonment costs of $124-million. Under this scenario, future annual production is forecast by GLJ to surpass 57,000 barrels per day in 2013.
The resource volumes have not been classified as reserves at this time, pending further delineation drilling, development planning, project design and regulatory application. The resource values should be considered indicative in nature, only, pending further design work to confirm timing and capital estimates. Readers are cautioned that there is also a difference between contingent and prospective resources with differing risks and that there is no certainty that it will be commercially viable to produce any portion of the resources.
Conventional reserves
Connacher's conventional reserve base also expanded during 2007.
On an oil equivalent basis, 1P reserves increased 5 per cent to 6.8 million boes after producing 850,000 barrels in 2007. The company's 2P equivalent reserves increased 8 per cent to 9.5 million boes.
The increases primarily reflect the successful drilling at Marten Creek, Alberta.
The GLJ 2007 report estimated that Connacher's conventional 1P reserves would generate $168-million of future net revenue with a 10-per-cent present value of $112-million, after provision for future capital requirements for Connacher's 1P reserves estimated at $14.3-million and abandonment costs net of salvage value at $4.4-million.
The company's 2P conventional reserves were forecast to generate $245-million of future net revenue, with a 10-per-cent present value of $143-million, after provisions for future capital requirements of $15.8-million and forecast abandonment costs of $4.8-million.
Connacher's conventional production provides current cash flow, loan value and a hedge against natural gas requirements at Great Divide.
Total company combined reserves (conventional and bitumen)
On a combined basis, Connacher's reserves accordingly grew at very significant rates. Total 1P equivalent reserves at Dec. 31, 2007, were estimated by GLJ to be 59.9 million boes, an increase of 19 per cent over year-end 2006.
Connacher's 2P equivalent reserves increased 101 per cent to 187.3 million boes at Dec. 31, 2007, compared with 92.9 million boes at year-end 2006.
The company's 2P conventional and bitumen reserves at year-end 2007 are forecast to generate $4-billion of future net revenue, with a 10-per-cent present value of $1.2-billion, after provisions for future capital of $1.1-billion and abandonment costs of $25-million. This represents a 127-per-cent increase in the 10-per-cent present value compared with 2006.
On a per share basis, this calculated present value for 2P reserves alone equates to approximately $5.70 per Connacher common share outstanding, before provision for the value of contingent and prospective resources as estimated in the GLJ 2007 report, the value of the company's refinery and its investment in Petrolifera Petroleum Ltd. and balance sheet adjustments. There are presently approximately 210 million Connacher common shares outstanding.
No reserve volumes or future net revenue or present value thereof was assigned herein to Connacher's 26-per-cent equity interest in Petrolifera Petroleum's crude oil and natural gas reserves in Argentina.
A detailed breakdown of reserves by category and other disclosure items related to the reserve reports referenced herein will be included in the company's annual report and its annual information form (AIF) which will be filed on SEDAR in March, 2008.
Unproved property valuation
Connacher retained Sayer Energy Advisors, independent energy advisers of Calgary, Alta., to conduct an evaluation of its unproved properties in Western Canada. Sayer completed a report with an effective date of Dec. 31, 2007. It was prepared according to Standard of Disclosure for Oil and Gas activities described in NI 51-101.
Sayer assigned a low value of $12.9-million, a median value of $14.7-million and a high value of $16.5-million to Connacher's 77,182 net hectares of petroleum and natural gas rights held in the provinces of Alberta, British Columbia and Saskatchewan as at Dec. 31, 2007. The valuation does not include any of Connacher's bitumen rights, which are evaluated within the GLJ 2007 report.