PetromineralesLtd. ("Petrominerales" or the "Company") (TSX:PMG), a 65 percent ownedsubsidiary of Petrobank Energy and Resources Ltd.("Petrobank")(TSX:PBG), is pleased to report solid results for the thirdquarter of 2010 highlighted by a 52 percent increase in production to32,667 barrels of oil per day ("bopd"), funds flow from operations ofUS$128.4 million (US$1.29 per basic share) and net income of US$35.4million (US
.36 per basic share). We maintained high operating netbacksat US$47.82 per barrel, a 12 percent increase over 2009. Our balancesheet remains strong with a US$517.4 million net working capital surplusand an undrawn $150 million credit facility. This financial flexibilitygives us the strength to continue to execute significant andaccelerated exploration programs during the remainder of 2010 andthrough 2011 on our high impact exploration lands in the Llanos basin ofColombia and Peru.
FINANCIAL & OPERATING RESULTS
Thefollowing table provides a summary of Petrominerales' financial andoperating results for the three and nine month periods ended September30, 2010 and 2009. Interim consolidated financial statements withManagement's Discussion and Analysis ("MD&A") are available on theCompany's website at www.petrominerales.com and will also be available on the SEDAR website at www.sedar.com.
FINANCIAL & OPERATING HIGHLIGHTS
(All references to $ are United States dollars unless otherwise noted)
Three months ended Nine months ended
September 30, September 30,
2010 2009 %change 2010 2009 %change
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Financial
(
00s, except
where noted)
Crude oil revenue 231,506 119,485 94 798,128 300,660 165
Funds flow from
operations (1) 128,430 71,709 79 444,505 177,653 150
Per share
- basic ($) 1.29 0.73 77 4.48 1.81 148
- diluted ($) 1.17 0.71 68 4.18 1.75 139
Net income 35,436 26,224 35 190,029 48,935 288
Per share
- basic ($) 0.36 0.27 33 1.92 0.50 285
- diluted ($) 0.35 0.26 35 1.85 0.49 278
Capital
expenditures 119,133 53,998 121 343,621 198,896 73
Total assets 1,580,161 659,876 139 1,580,161 659,876 139
Net working capital
surplus (deficit)
(1) 517,425 (6,189) - 517,425 (6,189) -
Common shares, end
of period (000s)
Basic 99,834 98,150 2 99,834 98,150 2
Diluted (2) 123,946 104,461 19 123,946 104,461 19
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Operations
Operating netback
($/bbl) (1)
WTI benchmark price 76.15 68.24 12 77.67 57.32 36
Crude oil sales
price (3) 64.54 56.29 15 64.83 46.07 41
Royalties 9.09 5.52 65 7.47 4.50 66
Production expenses 7.63 8.02 (5) 6.80 6.91 (2)
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Operating netback 47.82 42.75 12 50.56 34.66 46
Crude oil production
(bopd) (4) 32,667 21,546 52 38,298 21,621 77
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(1) Non-GAAP measure. See "Non-GAAP Measures" section within MD&A.
(2) Consists of common shares, stock options, deferred common shares,
incentive shares and the 2010 convertible debentures outstanding as at
the period-end date.
(3) Net of transportation and excludes revenue from purchased oil.
(4) Actual production sold for the three and nine months ended
September 30, 2010 was 32,696 bopd and 38,121 bopd respectively
(2009-21,239 bopd and 21,345 bopd).
HIGHLIGHTS
(comparisons are third quarter 2010 compared to the third quarter of 2009, except where noted)
- We increased crude oil production by 52 percent to 32,667 bopd;
- We generated a strong operating netback of $47.82 per barrel in the quarter, a 12 percent increase;
-We recorded funds flow from operations of $128.4 million ($1.29 perbasic share) and net income of $35.4 million (
.36 per basic share);
- We brought our Candelilla-4 well on production from the Guadalupe formation at over 3,000 bopd;
- On the Corcel Block we commenced drilling our Boa-2 development well, and completed drilling and logging of Arion-1; and
-We raised US$550 million through a convertible bond issuance in August.The bonds are convertible into common shares of Petrominerales at aconversion price of US$34.746 and have an annual coupon rate of 2.625percent.
OPERATIONAL REVIEW
Thirdquarter production averaged 32,667 bopd, and October productionaveraged 30,528 bopd. Our third quarter production was affected by ourCandelilla-1 well being offline for 22 days. Since-mid 2010 we have alsoexperienced periodic water handling restrictions that resulted in somewells being shut-in or operating at lower pump frequencies. We have anongoing program to optimize water handling and well productivity. We arecurrently operating five drilling rigs focused on the Llanos Basin. Weexpect to continue executing large capital programs through the rest of2010 and 2011 including expanded programs in the high impact areas ofthe deep Llanos Basin, the Llanos Basin heavy oil fairway, and in Peru.
COLOMBIA
Guatiquia
Productionfrom the Candelilla structure averaged 16,516 bopd during the thirdquarter of 2010 and 15,815 bopd during the month of October. Thirdquarter production was affected by the failure of an electricsubmersible pump ("ESP") in the Candelilla-1 well. As a result, the wellwas shut-in for a total of 22 days beginning in August until the wellwas placed back on production on September 12th. The Candelilla-4 welltargeted by-passed pay in the Guadalupe formation encountered whiledrilling each of the first three Candelilla wells. Candelilla-4 startedproducing 19 degree API oil at a rate of 3,000 bopd from two separateGuadalupe intervals. Based on these positive results, we are evaluatingan additional two to four wells targeting the Guadalupe formation.
Candelillaproduction is currently being handled through early productionfacilities built on the Block, now capable of handling up to 55,000barrels of fluid per day. We installed flow-lines between the Candelillatemporary facilities and our Corcel central processing facility. We arecurrently using these lines to transfer produced water to Corcel fortreatment which will reduce our water trucking costs. We expect totie-in the Candelilla crude oil production to our Corcel centralprocessing facility by the end of the first quarter of 2011.
Ournear-term drilling plan includes drilling two additional explorationwells, Yatay-1 and Azalea-1, and acquiring additional 3D seismic toprovide coverage over the entire block. Yatay-1 is expected to begindrilling operations in November 2010 and reach total depth prior toyear-end.
DuringAugust, the Candelilla exploration area reached cumulative productionof more than five million barrels. As a result, Candelilla production isnow subject to the ANH high price participation payment. During Augustand September, the additional royalty percentage was 14 percent. To theend of October, we have produced over six million barrels at Candelillaand we have recouped more than four time our total investment on theBlock in just ten months. Our Candelilla discovery highlights theprolific potential of the Llanos Basin.
Corcel
Corcelproduction during the third quarter 2010 was 8,155 bopd, consistentwith second quarter levels. During the month of October, productionaveraged 7,430 bopd. In July and August, production was affected byrestrictions in water handling capacity. We completed the expansion ofour water handling facilities to 80,000 barrels of water per day at theend of August. October production was temporarily impacted by our C1well being offline for 13 days due to a pump change.
TheBoa-2 well has now been drilled to a total measured depth of 12,843feet. Boa-2 well logs indicate 89 feet of potential net oil pay in twoseparate Lower Sand 1 intervals which compares favorably to Boa-1. InBoa-1 we encountered 48 feet of net pay in the Lower Sand 1 and 2intervals including 27 feet of net pay in the Lower Sand 1 formation.Following Boa-2, the rig commenced drilling the Corcel E2 well onOctober 22, 2010.
Webegan drilling exploration prospects in the Northeast portion of theCorcel Block starting with Amarillo-1. Well logs indicated a total of 46feet of potential net oil pay in the Guadalupe formation. The LowerSand 1 zone indicated an anomalous well log response and compellinghydrocarbon indications during drilling. Testing of two Lower Sand 1intervals resulted in the recovery of salt water and a small volume of 6degree API heavy oil. The Guadalupe formation tests resulted in therecovery of trace amounts of 31 degree API light oil. We subsequentlyperforated an additional Upper Guadalupe sand that tested wet. Thefuture evaluation program for Amarillo-1 could include drilling aside-track well targeting potential net pay in the Guadalupe formationthat recovered small amounts of 25 degree API oil.
Wehave completed drilling and logging operations at our Arion-1 well, thesecond exploration well on the Northeast portion of our Corcel Block.Well logs indicate 32 feet of potential net oil pay in the Guadalupe andLower Sand 1 formations. The first of a four zone testing program beganon October 15, 2010 using a service rig. However, shortly after thetest began we experienced a failure of the testing pump whichsubsequently became stuck during retrieval operations. Although we arecurrently evaluating options for remedial action for this well, it islikely that the well will need to be sidetracked or re-drilled.Following Arion, the rig moved to our Caruto-1 exploration location andbegan drilling operations on October 13, 2010. Caruto-1 is expected toreach total depth in early December. Following the Caruto-1 well we areconsidering drilling the Hobo-1 well from the Arion pad, using thegeological and geophysical information gained from Amarillo-1 andArion-1, b efore deciding on alternatives for Arion-1.
Llanos Foothills (Blocks 31, 25, 59, 15)
OnBlock 31, initial interpretation of our recently acquired 3D seismicprogram has resulted in the identification of additional prospectivity,further increasing our exploration drilling inventory. The 150 squarekilometre 3D seismic program was acquired during the second quarter ofthis year on the southern portion of Block 31 adjacent to and contiguouswith the Corcel seismic program. We plan to drill our first explorationwells on the Block in 2011. We are also planning additional 3D seismicacquisition on the Block to help define additional Corcel typeprospectivity as well as the large overthrust feature identified on thenorth western portion of the block.
OnBlock 25 we expect to begin drilling the first of two deep foothillswells targeting larger structural closures mapped from existing 2Dseismic data starting in mid-2011.
Thetiming for finalizing all the blocks awarded in the Open Round Colombia2010, including blocks 59 and 15 is expected to be confirmed by the ANHon November 8, 2010. On Block 59, our first phase work commitmentsinclude acquiring 303 square kilometres of 3D seismic and drilling fourexploration wells over three years. On Block 15, our first phase workcommitments include acquiring 101 square kilometres of 3D seismic anddrilling two exploration wells. We are in the initial stages of planningseismic acquisition programs for both of these blocks.
Central Llanos (Casimena, Castor, Casanare Este, Mapache)
InJanuary, we initiated a 13-well exploration program in the CentralLlanos Basin beginning with the Yenac-1 well on the Casimena Block thatwas placed on production April 13, 2010 at over 1,800 bopd of 16 degreeAPI oil from two Mirador sands. We have now drilled the Yenac-2 well,reaching a total depth of 8,760 feet measured depth. Log resultsindicate that the Mirador formation in Yenac-2 was penetrated 25 feethigher than that encountered in Yenac-1. Log analysis from Yenac-2indicates 48 feet of net potential pay in the well as compared to the 42feet of net potential pay we previously reported from Yenac-1. Testresults are expected by the end of November. Following Yenac-2, we planto drill the Mantis-1 exploration well. In addition, based upon thepositive results of Yenac-2 we are evaluating the potential for anadditional seven development wells on the Yenac structure.
Onthe Castor, Casanare Este and Mapache blocks we are currently planningadditional 3D seismic programs to be acquired during 2011. We also planto recommence our Mapache multi-well exploration program early in 2011.
Heavy Oil (Chiguiro Este, Chiguiro Oeste, Rio Ariari)
Duringthe quarter, we mobilized a drilling rig onto our Llanos Basin heavyoil acreage and commenced drilling the Avellana-1 exploration well onour Chiguiro Oeste Block. The well reached measured depth of 4,908 feeton August 18, 2010. The Avellana well encountered the Mirador formation110 feet structurally higher than in the Chiguiro Oeste-1 well. We havenow completed testing of all three test intervals. The intervals alltested water, however, during testing of the second interval we reversecirculated out light 29 degree API oil, and from the third interval wereverse circulated out heavy 9 degree API oil. The Avellana location wasbased upon the interpretation of existing reprocessed 2D seismic data.To better understand the potential of the Avellana structure we arecurrently evaluating a follow up strategy which may include acquisitionof additional 3D seismic.
FollowingAvellana-1, we began drilling the Asarina-1 well on our Rio AriariBlock. The well has been cased as a potential oil producer andencountered 79 feet of potential net pay from several Lower Miradorsands as compared to the 40 feet of Mirador pay we reported in the RioAriari-2 well and 14 feet of Mirador pay reported in Rio Ariari-1. Aninitial testing program targeting four separate sands commenced onOctober 30, 2010 with results expected in early December. The positiveAsarina results combined with the recently completed long-termproduction test of Rio Ariari provides indications of the potential formaterial accumulations of heavy oil on this block. Mochelo-1, the secondwell of a planned nine-well Rio Ariari exploration program, begandrilling operations on October 29, 2010. The nine well explorationdrilling program, including Asarina and Mochelo, is designed to targetnew exploration prospects and play-types that could result in theidentification of multiple large resource opportunities. We expect torun this program continuously for the remainder of 2010 and into 2011.
Neiva
Neivaproduction averaged 3,790 bopd in the third quarter, an 18 percentincrease from 2009, and has increased to average 3,845 bopd during themonth of October. During the first nine months of 2010 we have drilled20 wells. In 2010, we started drilling wells targeting the Monserrateformation, which have demonstrated similar productive capacity as ourDoima-Chicoral wells. We currently have an additional 38 developmentlocations to be drilled and we plan to be actively drilling on the blockthrough the remainder of 2010 and 2011, focusing on Doima-Chicoral andMonserrate formations.
Putumayo Basin (Orito and Las Aguilas)
Weare planning a multi-well drilling program in the area that is expectedto commence at the beginning of 2011. The program is planned to startwith two exploration wells on the Las Aguilas Block followed by our nextphase of development drilling at Orito. In addition, we plan to acquire50 square kilometres of 3D seismic to delineate the eastern flank andsouthern end of the Orito Block.
PERU
Block 126
OnOctober 13, 2010, Petrominerales agreed to acquire an additional 25percent interest in Block 126 in east central Peru. Under the terms ofthe agreement, Petrominerales will pay $6.75 million, including a cashpayment and carry for expenditures incurred through the upcomingdrilling program on Block 126. Additionally, a bonus of up to $8.0million is payable based on reaching certain aggregate production levelsfrom Block 126.
Wecompleted a 150 square kilometre 3D seismic program on Block 126 earlierthis year and we are in the final stages of evaluating the data andfinalizing drilling locations. Lease planning, construction andinfrastructure improvements are anticipated to begin in the fourthquarter of 2010 and an initial drilling program of up to three wells isnow expected to commence during the third quarter of 2011. We also planto reprocess approximately 1,000 kilometres of existing 2D seismic data.Pending interpretation of the reprocessed seismic data, we, togetherwith our joint venture partner, intend to initiate further environmentalimpact assessments in these new areas, with a view to expanding ourdrilling program on the Block.
Blocks 114 and 131
Petromineralesholds a 30 percent working interest in blocks 114 and 131. On Block131, the operator has initiated a 300 kilometre 2D seismic program andthe first well could be drilled in 2012. On Block 114, the nextexploration phase anticipates one exploration well being drilled by theend of 2012.
Block 161
Block161, situated in east central Peru, is 1.2 million acres in size and isowned 80 percent by Petrominerales. Current commitments, to becompleted by June 2012, include the acquisition of 350 kilometres of new2D seismic data and an updated geological and geophysical reportincorporating existing geological data and reprocessed seismic.
Block 141
Block141, situated in southern Peru, is 1.3 million acres in size and isowned 80 percent by Petrominerales. The Pirin field, situated on trendto the southeast of Block 141, produced approximately 300,000 barrels oflight 36 degree API oil between 1875 and 1915, but little work has beendone since. Current commitments, to be completed by May 2011, includethe acquisition, processing and interpretation of 300 kilometres of 2Dseismic.
COLOMBIAN PIPELINE INVESTMENT
Pipelinetakeaway capacity in Colombia, and particularly in the Llanos Basin,has become constrained as the country's production continues to grow. Tosupport our high impact Llanos Basin focused growth objectives we havemade an offer to participate for up to 10 percent of the OleductoBicentenario de Colombia ("OBC") project that is being led by Ecopetrol.If our offer is accepted, this investment is expected to providestrategic access to key offloading capacity and help maintain highrealized sales prices and per barrel profitability.
Phasezero of the project is now complete and has added 40,000 bopd of oiloffloading capacity at Banadia, connecting to the underutilized CanoLimon export pipeline system. Phase one of the project will connectLlanos Basin production from Araguaney to Banadia. This phase isexpected to cost approximately $1.0 billion ($100 million net) and addapproximately 120,000 bopd (12,000 bopd net) of offloading capacity bythe fourth quarter of 2011. Ultimately, phases two and three of theproject are expected be completed by the end of 2013 and will add afurther 330,000 bopd of gross takeaway capacity at a total incrementalgross cost of approximately $4.4 billion. In addition to providingaccess to key takeaway capacity, this OBC investment provides for amarket based rate of return and when compared to trucking productionfrom the Llanos Basin to Colombian export points, can result in overalltransportation savings of approximately $10.00 per barrel.
REORGANIZATION
OnNovember 2, 2010, Petrobank and Petrominerales announced a corporatereorganization that will see Petrobank shareholders receive Petrobank'sproportionate interest in Petrominerales (the "Reorganization").Petrobank and Petrominerales have signed an arrangement agreementdetailing the terms and conditions of the Reorganization. The Board ofDirectors of each company, after having received a recommendation froman independent committee of its directors, have unanimously approved theReorganization.
Pursuantto the Reorganization, a new Alberta corporation will be formed ("NewPetrominerales") which will, through a series of transactions under theReorganization, directly or indirectly acquire all of the outstandingshares of Petrominerales. Existing Petrominerales shareholders willreceive one share of New Petrominerales for every share ofPetrominerales they hold. Petrobank shareholders will receiveapproximately 0.62 shares of New Petrominerales and one replacementcommon share of Petrobank for each Petrobank common share held. Therewill be no change in the total number of shares outstanding for eitherPetrobank or Petrominerales.
Thistransaction is designed to enhance long-term value for Petrobank andPetrominerales shareholders. Benefits of the Reorganization include:
- Petrobank shareholders will receive direct ownership in the shares of New Petrominerales;
- All new and existing Petrominerales shareholders will directly receive future dividends from New Petrominerales;
- Canadian individual shareholders of New Petrominerales will receive dividends eligible for the Canadian dividend tax credit;
- New Petrominerales' public float will increase, providing additional liquidity to shareholders;
- New Petrominerales is expected to qualify for inclusion in the S&P/TSX Composite Index following the Reorganization;
-Increased valuation for Petrobank and New Petrominerales may result fromthe reduction or elimination of any holding company and parent companyshare price trading discounts; and
-The expected date of the Reorganization of December 31, 2010 may allowU.S. Petrobank shareholders to benefit from a lower tax rate on thetransaction as the receipt of the New Petrominerales shares are expectedto be treated as "qualified dividends", eligible for lower tax rates in2010 compared to the ordinary income tax rates that are expected in2011.
TheReorganization will not result in any changes to the existing Board andsenior management of Petrominerales. Petrominerales will continue topursue a repeatable, high impact exploration strategy, focused inColombia and Peru. The Reorganization will not affect the Petromineralesdividend policy and shareholders are expected to continue to receiveCDN
.125 per share paid on a quarterly basis. The first dividendpayable on New Petrominerales common shares is expected in mid-April forshareholders of record on March 31, 2011.
Wewill apply to have the New Petrominerales common shares trade on theToronto Stock Exchange under our existing PMG symbol. We are alsoupdating the listing documentation to apply to list New Petromineralescommon shares for trading on the Bolsa de Valores de Colombia (ColombianStock Exchange).
TheReorganization is subject to the approval of the shareholders of eachof Petrobank and Petrominerales. It is anticipated that ajoint-management information circular containing additional informationwith respect to the Reorganization will be mailed to each Petrobank andPetrominerales shareholder in mid-November and meetings of theshareholders of each of Petrobank and Petrominerales will be held inmid-December, 2010. The Directors of each company, upon considering therecommendations of their respective independent committee, haveunanimously recommended that their shareholders approve theReorganization. Pending approvals from the shareholders of each company,approval of applicable courts, receipt of appropriate regulatoryapprovals and satisfaction of other customary closing conditions,including the receipt of relevant tax rulings, the transaction isscheduled to become effective on December 31, 2010.
TheReorganization is expected to be non-taxable to Petrobank andPetrominerales as well as Canadian resident shareholders of bothcompanies. Canadian resident shareholders of Petrominerales will berequired to file a joint tax election with New Petrominerales to achievea tax-deferred exchange of their Petrominerales shares for NewPetrominerales shares. For U.S. shareholders of Petrobank, thistransaction will be treated as a taxable dividend according to U.S. taxlaws. It is expected that the dividend will be considered a "qualifieddividend" for U.S. tax purposes, subject to the reduced tax ratesapplicable to long-term capital gains for individuals, providedshareholders meet the holding-period requirements. For U.S. shareholdersof Petrominerales, this transaction is expected to be non-taxable. Taxinformation will be published on the websites of both Petrobank andPetrominerales in the near future; however shareholders are encouragedto seek the advice of their own tax professionals.