Ivanhoe Issues Quarterly Report, Production Update
Ivanhoe Energy Inc. on Wednesday filed its Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.
Revenue continued to grow, increasing 33% from the first quarter of 2006 and 97% from the second quarter of 2005, due to continued high oil prices and higher production. This increase in revenue was offset by higher depletion and depreciation expenses and an increase in business and product development expenses. Our net loss for the quarter was US$4.4 million. Cash flow from operating activities remained positive for the seventh consecutive quarter, generating US$3.6 million, with capital investments for the quarter at $3.7 million. Cash at the end of the quarter was $25.8 million.
Two significant additions were made to our leadership team this quarter, with the appointment of Robert Abboud to the board of directors as Independent Co-Chairman and Lead Director and Joe Gasca joining Ivanhoe Energy as President and Chief Operating Officer.
The commercial development program of our proprietary heavy oil to light oil upgrading technology (HTL) continued to progress, with the completion of a series of upgrades to the commercial demonstration facility (CDF) in California and the resumption of test runs.
Heavy-to-Light Oil Upgrading Activities
The HTL heavy oil upgrading commercial demonstration facility (CDF) that demonstrates a processing capacity of 1,000-barrels-per-day, located in the Belridge heavy oil field in California, successfully resumed test runs in the second quarter, following a series of planned upgrades to the facility. The most recent CDF run at the end of June was a 26-hour run of California vacuum tower bottoms (VTBs) in the High Yield configuration. Toward the end of the run, operations were shifted in the High Quality mode to commission the modifications.
The next test in this series will be a further run of California VTB's in the High Quality mode, followed by a multi-day test run of Athabasca bitumen from Western Canada in the High Yield and High Quality configurations. Bitumen from Canada's Athabasca oil sands region is onsite and ready for processing. Data from these runs will be used in our commercial discussions with potential partners and upgraded HTL product from these runs will be used for marketing studies. The High Quality configuration, appropriate for numerous resource opportunities around the world, including the oil sands in Western Canada, produces a more fully upgraded product, as well as high amounts of by-product energy.
We are continuing in discussions with a number of heavy oil resource owners for the potential commercial deployment of our HTL upgrading technology in heavy oil fields around the world. We believe that the value of this technology can be maximized by using it to create opportunities to acquire interests, and actively participate, in heavy oil development projects by building and owning the facilities.
We previously signed a memorandum of understanding with Egyptian Natural Gas Holding Company (EGAS), the state organization charged with the management of Egypt's natural gas resources, to prepare a feasibility study to construct and operate a gas-to-liquids (GTL) plant in Egypt. Provided we demonstrate an economically viable project, we will enter into negotiations with EGAS for a definitive agreement for the development of a GTL plant, for which EGAS has agreed to commit up to 4.2 trillion cubic feet of natural gas, or approximately 600 million cubic feet per day for the expected 20-year operating life of the proposed project.
The feasibility study has been completed and was presented to EGAS in the second quarter along with three commercial proposals. EGAS has advised that it is prepared to choose the preferred proposal and define their requirements for a term sheet, which could lead to negotiations for a definitive agreement for the development of a project.
South Midway - We have 57 producing wells in the 1,400-acre South Midway heavy oil field, with a working interest of 100%. Production performance is very stable with good response to both cyclic and continuous steam injection. Consistent with our strategy of development of our existing fields, a 10-well development drilling program is underway, with eight wells drilled and completed and two wells expected to be drilled by the end of the third quarter of 2006.
Citrus (Lost Hills) - We sold our interest in the producing Citrus properties in the first quarter of 2006, retaining 2,415 acres in the prospect. We were unsuccessful in farming out three wells to be drilled to test the shallow Etchegoin gas potential, but are pursuing other farmout opportunities on this property. We currently hold a working interest of 100% in the retained acreage.
North Salt Creek - We reduced the sale of natural gas from the North Salt Creek # 1 well and used it to generate steam in the second quarter for the two heavy oil discovery wells. Both oil wells produced initial rates of between 60 and 90 barrels per day, but production dropped off significantly. Both wells will be steamed again when a steam generator is available. We are the operator and own a 24% working interest in the well and the 900-acre lease block.
Knights Landing (Sacramento Basin) - We completed a 3-D seismic acquisition program in the fourth quarter of 2005 and interpretation of the seismic data is underway. We expect to continue processing and interpretation of the seismic data in the third quarter of 2006, and to recommence drilling in the fourth quarter of 2006.
Peach (North South Forty) - In 2005, we discovered natural gas at the Peach prospect in the North Antelope Hills area of Kern County. We have a 50% interest in the initial well after payout and a 50% working interest in the 1,800-acre prospect. Construction of a sales pipeline was completed and the first well was placed on production in the second quarter, however the well produced water and is currently shut in.
North Yowlumne - In December 2005, drilling commenced on the North Yowlumne prospect to a total depth of 13,000 feet to test the Stevens Sand which has produced over 110 million barrels of oil in the nearby Yowlumne field. The test program is proceeding from the lowest zone to the highest zone in the well. The lower zones tested a small amount of light 32 degrees and 36 degrees API gravity oil in an initial test program. A production rate has yet to be confirmed, as the operator of the well has experienced a number of mechanical and operational issues, which have significantly delayed the testing. The well is currently undergoing a workover before redeploying a down hole pump and restarting the production test.
LAK Ranch - We continue to produce 40 - 50 barrels of oil per day from the pilot phase of the project, which is comprised of three updip vertical steam injection wells, one horizontal production well and several observation wells. We plan continuous steam injection throughout 2006 while monitoring the production response and expect to reach a decision regarding future development in the fourth quarter of 2006. We currently have a 43% working interest in this project.
Spraberry - Our working interests range from 31% to 48% in 25 wells, which have stable oil and gas production of approximately 75 net barrels of oil equivalent per day.
China Oil and Gas Operations
Dagang - The gross production rate at the end of the second quarter of 2006 at the Dagang project was approximately 2,383 barrels of oil per day, compared to 2,450 barrels per day at the end of the first quarter of 2006. At the end of the second quarter we had six wells on workovers and 38 wells on production. In the second quarter, we fracture stimulated two wells in the northern block and one in the south and recompleted 11 wells. We are continuing to evaluate production results in the northern block to identify additional wells for fracture stimulation. We continue to assess prior fracture stimulations and related production rates in order to choose additional wells for this program and to assist in making critical decisions on resuming our drilling program. We are preparing a modified Overall Development Program that we expect to present to our Chinese partner in the third quarter of 2006.
Zitong - In April 2006, we were granted an extension of the first phase of our exploration contract to November 30, 2006, provided the second Phase 1 exploration well is spud before November 30, 2006. In the second quarter of 2006 we continued prospect development of this block and selected our second exploration well location, the Yixin # 1. After the drilling of the second exploration well, we will evaluate the results and make an election, along with our partner Mitsubishi Gas Chemical Company Inc., to enter into the next three-year exploration phase. We have a 90% working interest in this project and are the operator.
In the second quarter, a definitive agreement was signed for the previously announced proposed merger of Sunwing Energy Ltd. (Sunwing), Ivanhoe Energy's wholly owned China subsidiary, with China Mineral Acquisition Corporation (CMA), a U.S. public corporation. CMA will effectively acquire all of the issued and outstanding shares of Sunwing for a deemed estimated value of US$100 million, subject to working capital and long-term debt adjustments at closing. This transaction is subject to the approval of CMA shareholders. If the proposed merger is successfully completed, Ivanhoe Energy will own a substantial majority of the issued and outstanding shares of CMA.
CMA's charter currently provides that if the proposed merger is not completed by August 30, 2006, CMA will be liquidated and its net assets returned to its stockholders. It is anticipated that CMA will ask its shareholders to extend the August 30th date to March 31, 2007 to complete the transaction. It is expected that CMA shareholders will vote on the proposed extension by the end of August 2006.
Liquidity and Capital Resources
On June 30, 2006, our cash position was US$25.8 million. Our operating activities provided US$3.6 million in cash for the second quarter of 2006. Capital investments for the second quarter of 2006 were US$3.7 million.
In the second quarter, we completed a US$25.4 million non-brokered private placement financing. The financing involved the issuance of 11,400,000 Special Warrants to three investors at US$2.23 per Special Warrant. Each Special Warrant is convertible, at no additional cost, into one common share and one common share Purchase Warrant. Each Purchase Warrant carries a 5-year term and provides the holder the right to purchase one common share at US$2.63 per share.
Ivanhoe Energy is an independent international oil and gas exploration and development company pursuing long-term growth in its reserve base and production using key technologies, including its proprietary heavy oil upgrading process (HTL), state-of-the-art drilling and enhanced oil recovery (EOR) techniques and the conversion of natural gas to liquids (GTL). Core operations are in the United States and China, with business development opportunities worldwide.
- Ivanhoe, SBM Team Up in Alliance for Offshore Heavy Oil Development (Mar 20)
- Ivanhoe Finalizes Transfer of Zitong Block to Shell China (Dec 27)
- Ivanhoe Inks MOU for China Block Sale (Jan 11)
Company: Mitsubishi more info
- Mitsubishi Heavy Bets on New US Turbomachinery Demand (Feb 17)
- Shell-Led Group Delays Decision On Canada Gas Export Plan (Jul 12)
- Japanese Banks Expand To Ranks of World's Biggest Energy Lenders (Jun 09)
Company: EGAS more info
- Egypt Launches Tender for Third Floating Regasification Unit (Jun 29)
- BP Signs Agreement to Speed up Atoll Field Development (Nov 05)
- Egypt Awards 4 Offshore Oil, Gas Exploration Licences (Oct 06)
Company: China Mineral Acquisition Corp. (CMA) more info
- Ivanhoe Issues Quarterly Report, Production Update (Aug 09)
Company: Sunwing Energy Ltd. more info
- Drilling Commenced at Sunwing's 1st Mongolian Exploration Well (Aug 16)
- Ivanhoe: Positive Gas Flows Recorded at Zitong Well (Apr 04)
- Ivanhoe Strikes Gas in China's Zitong Block (Dec 21)