Mr. Heinemann stated, "The first quarter of 2006 was extremely important to Berry Petroleum as we continue to accelerate the change of the Company with our acquisition and development strategy. At the end of February, we completed the acquisition of a 50% working interest in the Grand Valley gas field in the Piceance Basin for $159 million, and have targeted approximately $50 million in capital for the development of that asset this year. We have completed seven wells since the acquisition with initial test rates per well between 1.3 and 2 million cubic feet per day (MMcf/D). These results are consistent with our acquisition metrics. In total we are currently producing over 4 MMcf/D (net) from the Williams Fork member of the Mesaverde formation from 10 wells and are on schedule to drill a total of 35 wells in 2006 on this new core area. The addition of this Piceance Basin resource position is a major step for Berry as we diversify our resource base with high-quality natural gas assets and improve our oil to gas production profile.
"In the Uinta Basin, we announced two successful oil wells on our Lake Canyon acreage in January. These wells tested at 163 BOE/D and 103 BOE/D, respectively, confirming the presence of oil in the Green River formations west of Brundage Canyon. The shallow gas potential of these wells from the upper reservoirs is currently being tested, and we have completed the tie-in of a gas pipeline to this area. We anticipate drilling four shallow confirmation wells at Lake Canyon beginning in June. Berry was also active on the Coyote Flats acreage, consistent with our goal of appraising our prospects in an expedient manner. We recently announced two successful Ferron well tests with production rates similar to the original discovery well located on the eastern side of the tract, and drilled two dry holes in the quarter.
"In California for the first quarter, we focused on drilling additional horizontal wells and maximizing the overall benefits of our steam injection in our cyclic operations and our new steam floods. We tested a new steam injection plan that attempts to heat a broader region surrounding the wells in our South Midway-Sunset properties compared to our previous single-well approach. The revised steam injection plan and our 2006 horizontal infill drilling program required us to shut-in several high rate horizontal wells, resulting in lower production in the first quarter. However, we are quickly getting back on track and our steam floods at Poso Creek and the Ethel D property are currently at record production levels. Our companywide production in the first week of May is approaching 25,000 BOE/D, as we are seeing strong contributions from Brundage Canyon in the Rockies as well as our California assets. We are working diligently to achieve our production target of 25,800 BOE/D in 2006.
"The recent results from our diatomite assets in California are also noteworthy. Production is nearing 300 BOE/D and the project is demonstrating a measurable thermal response that is consistent with our petro-technical analysis. These results are well aligned with our performance outlook for this area and we intend to determine the commercial viability of the project in the second half of 2006."
Ralph J. Goehring, executive vice president and chief financial officer, said, "Our discretionary cash flow in the first quarter of 2006 was a record $55.6 million, an increase of 11% compared to $49.9 million in the fourth quarter of 2005 (see Explanation and Reconciliation of Non-GAAP Financial Measures). Our earnings for the quarter were impacted by the $5.2 million charge related to dry holes (primarily Coyote Flats, Utah) and by a $4.8 million unrealized non-cash expense related to our natural gas derivatives. The purpose of these derivative instruments is to protect the acquisition economics of our Piceance Basin assets. We recently increased our credit facility to accommodate continuing growth of the Company by raising our borrowing base to $500 million from $350 million. Our long-term debt increased at the end of the first quarter to $249 million primarily as a result of our Piceance Basin acquisition. Our debt-to-enterprise value now stands at approximately 13%, which continues to be less than most domestic E&P companies that have a market capitalization of less than $5 billion. We are very active in all asset areas of the Company and expect improving results in this commodity market as we execute our capital budget and growth strategies."
First Quarter Production Summary Average Daily Production Three Months Ended ----------------------------------------- Oil and Gas 03/31/06 % 12/31/05 % 03/31/05 % ------------- ------------- ------------- Heavy Oil Production (Bbl/D) 15,407 66 15,997 68 15,813 72 Light Oil Production (Bbl/D) 3,303 14 3,438 15 3,343 15 ------------- ------------- ------------- Total Oil Production (Bbl/D) 18,710 80 19,435 83 19,156 87 Natural Gas Production (Mcf/D) 28,507 20 25,428 17 17,347 13 ------------- ------------- ------------- Total (BOE/D) 23,461 100 23,673 100 22,047 100
Explanation and Reconciliation of Non-GAAP Financial Measures:
Discretionary cash flow is net cash provided by operating activities before the net increase or decrease in current assets and current liabilities. This number is presented because of its acceptance as an indicator of an oil and gas exploration and production company's ability to internally fund development, exploration and exploitation activities and to service or incur additional debt. This measure should not be considered as an alternative to net cash provided by operating activities as defined by generally accepted accounting principles. A reconciliation of discretionary cash flow to net cash provided by operating activities is shown below for the three months ended March 31, 2005 and 2006 and December 31, 2005 (in millions) as follows:
Three Months Ended -------------------------- 03/31/06 12/31/05 03/31/05 -------- -------- -------- Net cash provided by operating activities $25.3 $65.5 $19.3 Add back: Net increase (decrease) in current assets and current liabilities 30.3 (15.6) 17.8 -------- -------- -------- Discretionary cash flow $55.6 $49.9 $37.1
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