During 2004 our oil and gas revenue grew 22 percent to $38.5 million, up $7.1 million compared to $31.6 million in 2003, our cash flow from operations grew 52 percent to $20.2 million, up from $13.3 million in 2003, our production grew 12 percent to an average of 2,565 boe/d, up from the year before, and our proved plus probable reserves grew to 6,622 mboe, up 8 percent from 2003. We will be striving to achieve similar gains during 2005 and we are pleased to report that during the first quarter of 2005, oil and gas revenues grew 12 percent to $10.1 million, up from $9.1 million recorded in the first quarter of 2004, cash flow from operations grew 20 percent to $5.3 million, up from $4.4 million in the first quarter of 2004 and net income improved by $871,000 (up 114%) to a profit of $0.1 million in the first quarter of 2005, up from a loss of $0.8 million recorded in the first quarter of 2004. These positive results were achieved in spite of a slight temporary decline in production of 7 percent to 2,411 boe/d that was the result of unusually warm weather in February and March 2005 that resulted in a premature spring breakup. Furthermore, we are pleased to report that as of today's date our current daily production is estimated at 2,800 boe/d with further increases anticipated with the ongoing tie-in and drilling program planned for the remainder of 2005.
We are confident that these successful results and achievements will be recognized in the market as we proceed with creative transactions and "World-Class" drilling offshore Trinidad where a minimum of 5 wells are planned for drilling over the next 12 to 36 months and as it becomes further known that Canadian Superior is now the largest public company holder of exploration acreage offshore Nova Scotia.
The cash flow being generated off our growing Western Canadian operations will continue to be prudently managed to provide Canadian Superior with the opportunity to work toward providing "home run" opportunities for shareholders. As noted later in this report, we have endeavored to establish a corporate policy going forward which will be focused on continued financial discipline and conserving cash and debt capacity to allow us to build the necessary "war chest" to progress firstly with our planned drilling later this year offshore Trinidad and secondly further activities offshore Nova Scotia.
TRINIDAD AND TOBAGO
In the first quarter of 2005, we continued to make steady progress in preparing for exploration drilling and development on our offshore Trinidad and Tobago holdings slated for October 1, 2005. In particular, in the first quarter of 2005, we received the detailed 3D seismic data over the "Intrepid" Block 5(c) and over nearby producing fields. Our Exploration Team has been extremely busy interpreting that data and has confirmed several drilling locations on "Intrepid". Based on detailed seismic a number of large structural gas prospects have been identified on the "Intrepid" Block (See Map, page 3) with multi-tcf potential and we expect the first drilling location will be announced shortly.
Trinidad is one of the most coveted oil and gas basins in the world today and for good reason. During the first week of May 2005, Trinidad and Tobago was named Country of the Year by Energy Magazine in Association with the Offshore Technology Conference, Houston, Texas. Offshore Trinidad is a "World-Class" basin with multiple large exploration and development opportunities as evidenced by recent drilling successes in the Columbus Basin, as well as having well developed, and developing LNG facilities and capacity, and ready access to international markets. 80% of North America's LNG is supplied from Trinidad and some of the largest producing wells in the world are located in Trinidad close to our acreage. For example, 15 of the top 25 British Petroleum (BP) producing wells world-wide are located in Trinidad. When you align this with the stable fiscal and legal regime that is present in Trinidad and Tobago, you have a fair win-win situation for all those involved; and, the Government and people are very knowledgeable and supportive of the oil and gas industry and aggressive explorers like Canadian Superior.
Canadian Superior is extremely honored to have been awarded the right to explore on Block 5(c) in the Government of Trinidad and Tobago Ministry of Energy and Energy Industries' 2003/2004 Offshore Competitive Bid Round in May 2004 and we are planning to proceed with drilling on Block 5(c), by October 1, 2005. We have named this project and Block 5(c) "Intrepid". "Intrepid" was the code name of a famous Canadian spy during World War II, and some historians have argued he was one of the most important factors in the Allies winning the war. The famous Canadian spy's name was William Stephenson. The name "Intrepid" in Webster's Dictionary is defined as "outstandingly courageous" or "fearless". We feel the name is very appropriate given the challenges we face daily in the oil and gas business, and given the challenges we have successfully faced and overcome during the past several months. The "Intrepid" Block 5(c) covers 80,041 gross acres and we have identified significant natural gas exploration and development potential, offsetting the large Dolphin gas field operated by British Gas, which we have identified based on our review of extensive 3D seismic data.
We have signed the Production Sharing Contract (PSC) for the "Intrepid" Block 5(c) and it has been recently reported in April 2005 that our PSC award has received Government approval. The final formal confirmation that the fully approved PSC is in place is expected shortly and it will pave the way for Canadian Superior to drill the first well, of our multi-well drilling program, planned on the "Intrepid" block off the East Coast of Trinidad for on or before October 1, 2005, subject to Government and regulatory approval. To assist Canadian Superior in going forward with our planned drilling in Trinidad, the Corporation has entered into a transaction whereby a non-competitive industry partner will participate on a promoted basis, paying 1/3 of Canadian Superior's cost to earn a 1/4 interest in Block 5(c). Accordingly, it is Canadian Superior's intention to operate the drilling of this exciting prospect and retain a 75% interest in the "Intrepid" Block by funding only 2/3 of the total cost of the first "Intrepid" well, which is expected to have a total well cost between U.S.$15 - 20 million to drill.
This strategy combined with the financial discipline outlined in this quarterly report should allow Canadian Superior to maximize its interest in the "Intrepid" prospect as our qualified drilling team proceeds forward with this exciting project. Accordingly, for 2005, we have focused our high impact attention directly on Trinidad to commence drilling as soon as possible in such a fashion that should minimize dilution and hopefully maximize returns for the Company and for its shareholders.
OFFSHORE NOVA SCOTIA, CANADA
Over the last 5 years due to our focused operations offshore Nova Scotia, Canadian Superior has become the largest public company holder of exploration acreage offshore Nova Scotia with 100% interests in six exciting exploration licences totaling 1,293,946 acres; during this time we have also evolved as one of the few active operators involved in all three main play types in the basin. This has resulted in our Company being fortunate enough to have gained the experience and manpower necessary to drill and operate some of the most complex and technically challenging wells in the world through our Halifax Office which will be integrally involved in our upcoming drilling operations in Trinidad and Tobago. At the same time further operations are planned for offshore Nova Scotia in due course.
Although due to 2005 cost considerations and capital budgeting requirements our drilling in Trinidad and Tobago will take priority over offshore Nova Scotia, we are preparing for further drilling Offshore Nova Scotia off the East Coast of Canada on our "Mariner" Block. During the first quarter of 2005, our Halifax team worked hard to advance further drilling and operations offshore Nova Scotia. Based on front end geological and geophysical analysis, completed over the past several months, two new prospective locations, as shown on the map below, have been identified for drilling on our "Mariner" Block. Drilling engineering, procurement and permitting activities to progress this additional drilling on our "Mariner" Project are well underway. Wellsite survey work has been completed at these 2 sites, and since the surveying, we secured the most critical long lead time item for the well by purchasing the 10 3/4 inch and 9 7/8 inch casing, for the next "Mariner" well. We are preparing to undertake further drilling, upon finalizing joint venture partners, and as rig availability firms up, which is expected not to occur prior to late fall of this year.
In addition to Canadian Superior's "Mariner" exploration project targeting Cretaceous and Jurassic gas bearing sands, we continue to work on our Abenaki Reef "Marquis" project and our "Mayflower" deepwater project. Our "Marquis Project" lands encompass two exploration licences with approximately 111,000 contiguous acres located in shallow water depths close to the existing Sable Offshore Energy Project producing infrastructure and EnCana's Deep Panuke discoveries. Additional detailed geophysical seismic data that can be analyzed in light of the measured well bore data obtained through the drilling of the "Marquis" L-35/L-35A exploration well may be obtained in due course and should allow us to identify optimal future drilling locations on the Abenaki Reef up-dip from our 2002 "Marquis" L-35/L-35A well. We also understand that EnCana is planning 2 or 3 more wells on this Abenaki Reef trend.
Canadian Superior's "Mayflower" deepwater project exploration licence covers approximately 712,000 acres and is located approximately 460 kilometres (285 miles) east of Boston. Mapping to date indicates the presence of five sizeable deepwater prospects within the "Mayflower" block. These large prospects are structural and are typically formed by mobile salt tectonics. Prospect sizes range from 50 to 200 square kilometers (19 to 77 square miles) in size and are located in 1,300 to 2,500 metre (4,265 - 8,200 feet) water depths. We are currently working to secure partners for this exciting prospect and we are planning to proceed with a high resolution seismic program over the "Mayflower" block to further define targeted structures to enable future drilling.
We also have identified several other Cretaceous and Jurassic prospects on our "Marauder" and "Marconi" exploration lands covering an additional 371,000 additional acres offshore Nova Scotia. These exploration licences were targeted for acquisition based on analysis of proprietary seismic data and in-house geological evaluations. "Marauder", encompassing approximately 312,000 acres, directly offsets three Significant Discovery Licences (Uniacke, Citnalta and Arcadia). "Marauder" has four seismically defined prospects, two of which lie on trend with and are related to the Uniacke and Citnalta significant discoveries. These provide Canadian Superior with additional attractive prospects in this proven area. "Marconi" (EL 2416), encompassing approximately 59,000 (100% owned) acres, has a seismically defined tilted fault / anticlinal prospect similar to other Sable area fields such as Glenelg and Alma.
The Sable Island area gas supply is very important and strategic for the North Eastern United States gas supply, and we are confident that being the largest public company holder of exploration acreage in this area will be very rewarding for Canadian Superior and our shareholders.
In addition to continuing to progress our "high impact" opportunities in Trinidad and Tobago and offshore Nova Scotia, during the first quarter of 2005, we have worked hard in Western Canada continuing to develop Western Canadian cash flow and production, focusing on developing our Drumheller Alberta core area and several high impact drilling opportunities. Our Corporation has major acreage and production holdings in the Drumheller area, located in Central Alberta, with year round access, and as of the end of the first quarter of 2005, Canadian Superior holds 181,995 gross acres in this multi-zone area.
During the first quarter of 2005, Canadian Superior drilled a total of 4 wells (3.15 net) and tied-in 2 producing oil and gas wells and 3 producing gas wells. Because of early spring breakup in southern Alberta only one well (drilled and abandoned) was drilled in the Drumheller area to preserve an existing lease. The bulk of the Corporation's 2005 drilling, completion and tie-in programs are scheduled for late Q2, Q3 and Q4 of 2005, with a total of approximately 20 wells planned for drilling on its Western Canadian lands in the second quarter and approximately 17 wells in the third quarter, a number of these being non-operated coal bed methane (CBM) wells.
Of particular interest during the 2005 winter drilling and completion program were natural gas discoveries at Drumheller and Windfall. Drumheller, as Canadian Superior's core producing area, generates the majority of the Corporation's cash flow through the sale of oil and gas. At Drumheller, the Corporation recently completed the drilling and testing of a 100% W.I. gas well that A.O.F. tested 10 mmcf per day. This well is capable of producing 2.3 mmcf gas per day with 40 bbls per day of additional condensate production, and has recently been tied-in and put on production at a restricted rate of about 635 mcfd. Shortly, as further line capacity becomes available, production from this well will be increased to add more to daily production.
Also of particular note at Drumheller, seven coal bed methane (CBM) wells (W.I. 30%) have been recently successfully completed with a combined test rate of 1.2 mmcf per day and are scheduled to be tied-in shortly in the second quarter of 2005, as noted below. The CBM production is being obtained from the Horseshoe Canyon formation and we are pleased to report that this formation does not produce any significant associated water with the gas production. We intend to use these encouraging results from this non-operated lower working interest test project to build a solid foundation for development of the extensive CBM potential that exists over our large high working interest acreage base within the Drumheller area. A total of 8 CBM wells, including the wells noted above, are scheduled for tie-in in the second quarter, with 13 more CBM wells planned for drilling in the second quarter and at least an additional 10 CBM wells are planned in the third quarter of 2005. We have approximately 108 net sections (69,120 acres) in the Drumheller area with potential for coal bed methane production. As an indicator of the latent land value of our CBM acreage in this area, recent land sale prices in the Drumheller area for coal bed methane rights have exceeded $250,000 per section (approximately $390 per acre). Given the success we have initially experienced in the Drumheller area with coal bed methane, we are looking at creative ways to maximize the value of this asset.
Western Canadian High Impact Opportunities
Canadian Superior also holds operated high working interests in a number of other Alberta and British Columbia properties that are primarily in winter access areas. These other areas total an aggregate of 97,199 gross acres (78,129 net acres) in Alberta and 15,243 gross acres (11,766 net acres) in British Columbia. The main operated areas in Alberta are Windfall, Boundary Lake and Bison. In British Columbia, the main operated areas are Altares, Umbach and Parkland, all of which are considered to be potential high impact areas.
In March of 2004, Canadian Superior Energy Inc. shot a 62 square kilometer 3D seismic program in the East Ladyfern area to further evaluate the Slave Point potential demonstrated in the tested 7-2-92-11W6 well located in a remote area in North Western Alberta, Canada. The 3D indicated follow-up locations to the south and additional 2D seismic was shot. A follow-up location, located at 1-26-92-11W6 was surveyed and the site prepared for drilling in late 2004 after freeze up. The well was spudded in late January of 2005 and Canadian Superior completed the drilling of this Slave Point operated exploration test well (75% W.I.). The well was drilled to depth and cased, but due to unseasonably warm weather in this winter access only area, the Corporation was unable to complete and evaluate this well prior to spring breakup and the prospect will be further evaluated during the next drilling season.
Additional 2D seismic was shot in the Windfall area in West Central Alberta early in 2004 to evaluate several potential zones in the Cretaceous and the Jurassic. Two wells were successfully drilled during the winter of 2004/2005 resulting in two natural gas discoveries in the Windfall area. One gas well (100% W.I.) was successfully drilled, completed and tested at 1.5 mmcf per day and a second non-operated gas well (40% W.I.) was drilled, completed and tested at 750 mcf per day. The wells are currently in the process of being tied in, and it is anticipated that both wells will be on production, later in May, and further add to Canadian Superior's growing Western Canadian production base.
In addition, the Corporation plans on entering one of its existing producing wells in this area and completing a perspective zone that is expected to further increase the area's production.
The Boundary Lake area has seen new emphasis in Canadian Superior's exploration effort. Several test seismic lines have been reprocessed which has initiated a larger reprocessing project and a renewed interest in this area. Exploration efforts are still in the planning stages, but with the current land base of over 9000 net acres, the Corporation is looking to this area for future potential reserve adds. The Company was successful at recent crown land sales and plans on purchasing 3D seismic data in the area.
British Columbia - Umbach, Altares, Parkland
Although Canadian Superior continues to be active in Altares and the Parkland area of NEBC, and the Venus, Botha and Chinchaga areas of Northern Alberta, these areas have been re-evaluated in 2004 and the Corporation has at this time shifted its emphasis to the core areas in Alberta, Offshore Nova Scotia and Offshore Trinidad.
As noted in our 2004 Annual Report issued in March 2005, several pending transactions are being considered in British Columbia and these will help shape the future of these areas.
We are pleased to report a profitable first quarter 2005, with oil and gas revenues, cash flow from operations and net income all up from the same period in 2004. Oil and gas revenue, before royalties, increased by 12 percent to $10.1 million in the first quarter of 2005, as compared to $9.1 million in the same period in 2004. The revenue increase was due to higher commodity prices in 2005. Our average sales price in the first quarter of 2005 was $46.64/boe ($7.59/mcf for natural gas and $50.34/bbl for oil and NGLs) up 21 percent from $38.42/boe in the same period in 2004 ($6.60/mcf for natural gas and $34.52/bbl for oil and NGLs).
We are also pleased to report that cash flow from operations increased 20 percent to $5.3 million in the first quarter of 2005, up from $4.4 million in the same period in 2004. Also, the Corporation recorded an increase in net income of $871,000 (up 114%) to a profit of $0.1 million in the first quarter of 2005, up from a loss of $0.8 million recorded in the first quarter of 2004.
These positive results are in spite of a slight temporary decline in average daily production of the Company of 7 percent to 2,411 boe/d in the first quarter due to unusually warm weather in February and March 2005 that was the result of a premature spring breakup. As previously noted in this report, we are also pleased to report that as of today's date our current daily production is estimated at 2,800 boe/d. Further increases are anticipated with the ongoing tie-in and drilling programs outlined planned for the remainder of 2005.
Our undeveloped land acreage in Western Canada at the end of the first quarter of 2005 was approximately 165,538 gross acres (139,788 net acres) with an average working interest of 84%.
Canadian Superior is the largest public company holder of exploration acreage offshore Nova Scotia, where Canadian Superior currently holds 100% working interests in six licences covering an aggregate of 1,293,946 acres.
In Trinidad and Tobago, Canadian Superior's Mayaro/Guayaguayare (M/G) "Tradewinds" joint venture lands cover 55,000 gross acres and our "Intrepid" Block 5(c) covers 80,041 gross acres. Total acreage is now 135,041 gross acres, resulting in Canadian Superior becoming a significant strategic acreage holder in Trinidad and Tobago.
CORPORATE RESPONSIBILITY AND COMMUNITY INVOLVEMENT
Canadian Superior is a strong advocate of direct corporate involvement in communities contributing to, or affected by, its activities. We believe that direct community involvement enhances our ability to properly achieve common goals. Significant efforts are exerted to ensure that we have a responsible and responsive corporate presence. We conduct regular discussions with community representatives and stakeholders and we take care to ensure that planned activities are fully explained. Our attitude of direct involvement with local communities is consistently supported by sponsorship of community programs.
As detailed in our 2004 Annual Report, in Western Canada, Canadian Superior has been a sponsor of urban and rural communities, charitable organizations and sponsorships including cancer research in Alberta. This includes again this year in June, the Corporation being the major sponsor of 4H on Parade which is one of the largest rural youth agricultural shows in North America and the largest rural youth agricultural show in Canada. We intend to actively continue with support for community and charitable programs and initiatives and we encourage our staff and management to do the same. In addition to regular charitable donations, in Nova Scotia, Canadian Superior's contributions continue to include significant support to education and training, as well as to oil and gas related research and development activities, for students enrolled in undergraduate education programs in Nova Scotia.
In Trinidad and Tobago, Canadian Superior considers it important to promote the development of people by imparting to Trinidad and Tobago nationals technology and business expertise in all areas of energy sector activity, and is committed to a number of programs which are associated with the provisions of the proposed Production Sharing Contract between the Government of Trinidad and Tobago and the Ministry of Energy and Energy Industries and Canadian Superior regarding Block 5(c). In addition, and separate from those programs, and also in recognition of our Mayaro/Guayguayare (M/G) Joint Venture with Petrotrin, Canadian Superior has recently established the Canadian Superior Energy Canada - Trinidad and Tobago Charitable Foundation to undertake various additional programs including the promotion of educational training, as well as research and development activities, for students enrolled in undergraduate educational studies in Trinidad and Tobago. This program is modeled after our very successful Nova Scotia program supporting undergraduate education, training and research and development, as briefly outlined above.
In summary, we look forward to continuing to actively support programs related to the communities and stakeholders that support our corporate objectives and growth strategies.
OUTLOOK - 2005 and Longer Term
Accordingly, Canadian Superior believes that its strategy to create high impact opportunities, value and growth is well positioned for 2005 and the years beyond. This year Canadian Superior's "High Impact" offshore drilling program is clearly centered on drilling in Trinidad and Tobago with further activities planned for offshore Nova Scotia in due course.
Western Canadian operations will continue to be focused on the Company's core producing area of Drumheller, Alberta, with emphasis also being placed on Canadian Superior's exciting new Western Canadian coal bed methane (CBM) opportunities in the Drumheller area where we have extensive holdings.
We are also confident that as the above mentioned opportunities are being developed, the market will recognize the underlying value and the tremendous strengths and opportunities related to our growing asset base, as we continue forward and strive to maintain our financial discipline and strong balance sheet having successfully overcome a number of challenges faced by the Company.
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