PanOcean Announces Record Q3 Production

PanOcean reports results for the three months ended 30 September 2005 (all amounts in US$). Highlights include:

  • Operating cash flow after tax increased 65% to a record $22.9 million in Q3, or $0.94 per share from $13.9 million ($0.59 per share) in Q2 2005 with Brent crude oil averaging $61.64/bbl and the Company's production completely unhedged;

  • Profit after taxation in the third quarter was a record $11.9 million or $0.49 per share, compared to $7.5 million or $0.32 per share in the previous quarter;

  • Capital expenditures during the second quarter were $23.4 million compared with $33.8 million in the previous quarter;

  • Net working capital increased 154% to $51.3 million. Long-term debt at 30 September 2005 was $13.3 million;

  • 492,440 Class B shares issued on conversion of the subordinated debenture;

  • 1,250,000 Class B Subordinate Voting Shares issued at CDN$32 per share for gross proceeds of CDN$40 million ($33.7 million);

  • Record production of 10,108 bopd in Q3 2005, up 11% over Q2 Etame being up 7% and onshore production up 18%, exiting the quarter at 10,500 bopd;

  • The Etame ET-6H well, offshore Gabon, entered commercial production on 2 August 2005, and is currently producing at 6,700 bopd (2,100 bopd net PanOcean);

  • In early September, Etame field production was brought down to approximately 18,500 bopd (5,800 bopd net PanOcean) by shutting in ET-3H as a result of pressure interference with ET-6H. The field stabilised and has been producing at levels up to 19,000 bopd (5,950 bopd net PanOcean) since; and

  • Two wells, Iboga-1 on Iris Marin offshore completed during Q3 and AWOCHE-1 on Awoun onshore completed during October, both resulted in dry holes.
        Financial and Operating Highlights
                                THREE MONTHS ENDED         NINE MONTHS ENDED
        (US$000, US$ per
         Class A and          30 JUN   30 SEPT     %    30 SEPT   30 SEPT     %
         Class B Share)         2005      2005  CHANGE     2005      2004  CHANGE
        Operating cash flow
         after tax(1)         13,885    22,933    65%    49,590    24,969    99%
          per Class A and
           Class B Share -
           diluted              0.59      0.94    59%      2.07      1.23    68%
        Profit (loss) for
         the period            7,533    11,891    58%    23,350     5,688   311%
          per Class A and
           Class B Share -
           diluted              0.32      0.49    53%      0.97      0.28   246%
        Netback per barrel
         after tax             22.76     28.48    25%     22.59     17.85    27%
        Capital expenditures  33,837    23,393   (31%)   64,125    26,253   114%
        Working capital       20,120    51,287   154%    51,287    11,335   352%
        Long-term debt        23,233    13,322   (43%)   13,322    19,040   (30%)
         equity              102,809   156,964    53%   156,964    57,756   172%
        Class A and Class B
         shares outstanding
         at period end
         (000s)               22,939    24,714     8%    24,714    21,137    17%
        Class A and Class B
         shares diluted
         weighted average
         for the period
         (000s)               23,722    24,462     3%    23,954    20,342    18%
        Production -
         crude oil (bopd)      9,127    10,108    11%     9,443     8,213    15%
        Average crude oil
         price Brent ($/bbl)   51.64     61.64    19%     53.55     36.36    47%
        Average net realised
         crude oil price
         ($/bbl)               49.56     58.70    18%     51.32     35.74    44%
        (1) Management's Discussion and Analysis contains the term "operating
        cash flow". Operating cash flow is a non-GAAP (Generally Accepted
        Accounting Principles) term that represents profit before depletion,
        depreciation and accretion, deferred income taxes, stock-based
        compensation and loss on changes in value of derivative instruments. Cash
        flow per share is calculated using the same weighted average number of
        shares outstanding as earnings per share.
        All amounts are in US$ unless otherwise indicated.

    The third quarter of 2005 was PanOcean's strongest quarter in its history, with record production in an unprecedented oil price environment that generated record financial results for its shareholders. Compared with Q2, PanOcean increased production 11% to a record 10,108 bopd; increased after tax cash flow 65% to $22.9 million or $0.94 per share; and posted a net profit of $11.9 million or $0.49 per share, up 58% from Q2.

    Financially, the Company made significant improvements to an already strong balance sheet during the quarter. In August, PanOcean issued 492,440 Class B shares on conversion of its debenture, eliminating over $10 million in long-term debt, to leave the Company drawn $13.5 million on its bank line. To ensure that the Company was well financed through the completion of its next phase of growth, PanOcean raised CDN$40 million ($33.7 million) in new equity by way of a bought deal in early September, issuing 1.25 million Class B Shares at CDN$32.00 per share. By the end of the quarter, the Company had over $51 million in working capital.

    Operationally, PanOcean made tremendous progress during the quarter as its financial results attest. The first few wells at Tsiengui were on production for the quarter contributing to the overall increase in production. Full development of the Company's Tsiengui field remains a high priority for PanOcean over the next year. The KCA Deutag rig which was contracted in Q2 for PanOcean's exclusive use is now in Gabon and started a workover in the Obangue Field to repair a saltwater disposal well before moving up to start operations in the Tsiengui Field.

    Work on the onshore export pipeline is ahead of schedule. By the end of Q3, 26 kilometres of 10" diameter pipe was in the country and construction contracts were signed for the export pipeline. Approximately 40% of the civil works for the pipeline right-of-way are completed and pipeline construction will soon commence. The completion date for the pipeline, pump station and Tsiengui Central Production Facility was moved forward from September to June 2006.

    Exploration has been a challenge this year the Company came up dry on Iris offshore, and Chevalier and Merle onshore during and immediately after the quarter. The Company is however, confident of the prospectivity of its portfolio and is committed to explore and develop its acreage. Discoveries made last year from its Exploration programme are the assets that will be developed throughout its 2006 and 2007 programmes.

    PanOcean's principal objective moving into Q4 is to continue executing on its plan to grow production and cash flow. An environment of tight supply, exacerbated by Hurricane Katrina, presents continuing challenges of meeting rising costs and difficult deliveries. PanOcean has taken these challenges into account in its plans.


    The Company commenced commercial oil production operations at its Tsiengui field onshore Gabon in mid-June. Nine months after the Tsiengui discovery, the first two wells, TST-2H and TST-3H, were brought onstream through early production facilities at a combined stabilised rate of 2,400 barrels per day ("bopd") gross (2,220 bopd net to PanOcean's 92.5% interest).

    The third well in the Tsiengui field, TST-4H, was brought onstream in August 2005 marking the completion of the first phase of development of the Tsiengui Field and raising the Company's total productive capacity from the Tsiengui and Obangue fields to approximately 5,600 bopd (5,180 bopd net). Subsequent well tests were concluded on all three wells to collect data that will be used to determine the optimum number of development wells and the spacing of the wells within the reservoir. The combined production from Tsiengui and Obangue is being transported through the existing six-inch diameter pipeline from Obangue to the Total-operated Avocette facility. Combined Tsiengui and Obangue crude exports for Q3 averaged 3,427 bopd compared with 2,237 bopd in Q2, or on a monthly basis 2,966 bopd, 3,300 bopd and 4,035 bopd for July, August and September 2005, respectively, reflecting the success of ongoing efforts working with the operator of Avocette.

    Approximately 26 kilometers of 10-inch diameter line pipe has been delivered to Port Gentil, Gabon along with the associated valves, fittings and materials to construct the export pipeline south between Obangue and the Total-operated Coucal field. Contracts were finalised for the installation of the pipeline with the civil works having started in September 2005. Engineering design of the Tsiengui central production facility ("CPF") and export facilities were completed during the quarter and equipment and materials have been ordered for the installation and construction. The CPF has a design capacity of processing and handling 15,000 barrels of oil per day ("bopd"), 7,500 barrels of water per day ("bwpd") and 30 million standard cubic feet of gas per day ("mmcfd"). CPF equipment is due to arrive in the first quarter of 2006, with commissioning of the facility scheduled to coincide with the completion of the ten-inch export pipeline in June.

    The KCA-Deutag Rig T-48 was transported from Thailand and arrived at Port Gentil during the first week of September. After clearing customs, the rig is being mobilised into the field to drill the planned 17-well Tsiengui development program beginning in November 2005 to extend through 2006.

    With acquisition of the 50 square kilometer Tsiengui 3-D survey completed in early July, processing is being undertaken by Veritas DGC in the UK. Processing of the Pre-Stack Time Migration ("PSTM") data is final and complete and interpretation of the PSTM data by the Company is now complete. Depth imaging Pre-Stack Depth Migration ("PSDM") is still underway and is expected to be completed during the fourth quarter.


    Capacity limitations at the Avocette export terminal continued to constrain exports of crude oil from Obangue and Tsiengui throughout the quarter. With priority being given to Tsiengui volumes, Obangue production was curtailed to meet pipeline limitations. However, by the end of August efforts made by the operator of Avocette to de-bottleneck the terminal had been partially successful and shipments by the end of September were back to second quarter levels, with export volumes of up to 5,000 bopd being achieved. The Obangue well NZOB-2AHZ was shut-in to prepare for the work-over on the adjacent water disposal well in early November, which will become the first operation for the newly contracted KCAD rig.

    Re-evaluation of 3-D seismic data covering the south-eastern section of Obangue was completed providing encouragement that the field potentially extends beyond the pool boundary as currently defined. A step-out appraisal well location has been identified and a suitable drilling slot in the KCAD rig schedule is being evaluated.


    During the quarter, the Awoun partners agreed on final locations and performed the necessary detail well planning for the Chevalier (AWOCHE-1) and Merle (AWOMER-1) prospects. AWOCHE-1 was spudded in mid-September using the Shell-operated Simpler 101 rig to evaluate a subsalt Gamba sandstone target and drilled to a total depth of 2,147 metres and logged. PanOcean's petrophysical analysis of well logs indicated that the Gamba sandstone was water wet. The total Gamba Sandstone reservoir thickness encountered is 57 metres (187 feet). The well was subsequently plugged and abandoned. The Simpler 101 rig then moved to the Merle prospect to drill AWOMER-1, to the northwest of the Koula field. The AWOMER-1 exploration well was drilled to a total depth of 1,780 metres and logged. PanOcean's petrophysical analysis of well logs indicates that the Gamba sandstone was water wet. The total Gamba Sandstone reservoir thickness encountered is 76 metres (250 feet). The well was subsequently plugged and abandoned. While the results of both Chevalier and Merle were disappointing, the wells proved the continuation of a thick Gamba Sandstone trend through the Awoun Permit which, in the Company's view, continues to be prospective and will require additional exploration work.

    Subsurface modeling of the Koula and Damier discoveries continued during the quarter and a final investment decision by the operator will be made following the drilling of exploration prospects Chevalier and Merle. The Company believes that its rapid development of nearby Tsiengui production along with the export pipeline out of the area will offer early production opportunities to existing discoveries on Awoun.


    Well ET-6H was brought on-stream on 2 August and the Etame field rate was initially increased to over 22,000 bopd (6,900 bopd net PanOcean) during the month. These rates, however, did not prove sustainable as pressure interference among adjacent wells began to affect individual well productivity. The field rate was subsequently constrained to approximately 18,500 bopd (6,912 bopd net) by shutting in well ET-3H in order to stabilise production and optimise recovery from the field. Following the shut-in of ET-3H, the field has stabilised at over 18,500 bopd. The Company does not see an impact on oil-in-place and believes that the reduced production rate will be effective in maximizing the potential to fully recover the Etame reserves.


    Due to the effects of recent hurricanes in the Gulf Mexico on local manufacturers and fabricators, construction of the Avouma platform and topsides has been adversely affected. A delay of approximately three months has been incurred with the platform and topsides planned to be shipped from the US Gulf in May 2006. Installation is now expected in Q3 2006 with first oil planned for the fourth quarter of that year. In accordance with this schedule, the Global Santa Fe jackup rig Adriatic VI has been contracted to commence operations during September 2006. The rig rate will be approximately 50% higher than anticipated due to the general rise in rig rates resulting from the tight supply conditions in the market which were exacerbated by recent severe weather in the US Gulf of Mexico.

    Due to these delays, the installation contract for the Avouma platform is being re-bid, however it is very likely that the total development cost will be approximately $102 million ($32 million net PanOcean), substantially higher than originally estimated but in line with prevailing market conditions. In the interim, the Etame co-venturers are working on a revised reservoir model of Avouma incorporating the drilling data obtained with the South Avouma exploration well drilled earlier in the year. Notwithstanding an environment of increased capital costs and timing delays, the Company is confident that the Avouma development still provides an attractive investment opportunity.


    The 696 square kilometre third-party 3D seismic survey which extends over the northwestern portion of the Etame Marin Permit and the southern end of the Themis Marin Permit is expected to be processed and interpreted by the end of the year. The survey covers the Ebouri discovery and a prospect, Lead "M", lying west of Ebouri. Subject to the results of this survey, Ebouri is planned to be a single well development incorporating a remote platform and a dry tree completion also tied back to the existing Etame FPSO infrastructure. In light of the current environment of increased capital costs, the Operator is undertaking a re-evaluation of the Ebouri project scope.

    Themis Marin/Iris Marin

    The first exploration well in the Sterling Energy operated Iris Marin Permit offshore Gabon, Iris Iboga Marin-1, was drilled during the quarter. The well was drilled to a depth of 2,035 metres, reaching a sub-salt Gamba sandstone target where it penetrated over 30 metres of reservoir-quality sandstones which, however, were water bearing. The well was being plugged and abandoned as a dry hole. The results are currently being evaluated and integrated into a review of the overall prospectivity of the block.

    With the seismic data from the Ebouri/Themis 3-D survey, Themis prospect definition and maturation is expected to begin in the first quarter of 2006. An exploration commitment well is planned for the third quarter of 2006, to be finalised once interpretation of data is complete.


    Daily production for the quarter ended 30 September 2005 averaged 10,108 barrels of oil per day ("bopd"), an 11% increase over the previous quarter, and a 15% increase over the same quarter in 2004. Production for the quarter was split 38% onshore and 62% offshore. PanOcean currently operates all of its onshore production.


    The Etame field produced a total of 1.83 million barrels (gross) of oil during the quarter ended 30 Sept 2005, contributing an average of 6,231 bopd net to PanOcean (31.36% working interest), an increase of 9% compared with the same period in 2004 and an increase of 7% over the previous quarter. By the end of Q3 the field had produced a cumulative total of approximately 18.5 million barrels ("mmbbl"). Whilst the interference effects experienced when ET-6H was brought onstream were much greater than predicted, causing a short term reduction in field offtake rate, the field in general continues to perform very well with overall field water cut below 5%. Four liftings were made from the FPSO during the third quarter accounting for exports of 1.85 mmbbl (0.58 mmbbl net to PanOcean).


    The third quarter saw the first full quarter's production from Tsiengui which achieved an average of 1,954 bopd net to PanOcean, with production coming primarily from wells TST-3 and TST-4. Following the partial success in debottlenecking Avocette pipeline and facilities through which both Tsiengui and Obangue crude are exported, export volumes in excess of 4,000 bopd have been experienced regularly. PanOcean is continuing to work with the operator on the debottlenecking that could allow an increase in near-term export capacity to approximately 5,000 bopd.


    Production during Q3 decreased to 1,016 bopd, down approximately 50% over the previous quarter. This decrease was due to a curtailment of Obangue production necessary to allow Tsiengui production volumes to be exported through the capacity limited Avocette terminal. Obangue production was successfully restored in September following increased export capacity.


    Production from the Remboue field decreased 8% over the previous quarter, contributing 907 bopd net to PanOcean. This reflects the natural production decline of the reservoir.


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