"ProspEx achieved record production in the second quarter, and we are well positioned to meet our targets for 2007. We look forward to the results of our summer drilling program, which is currently underway in both West Central and Southern Alberta," said John Rossall, President and Chief Executive Officer. "The Company continues to maintain a strong financial position, with net debt to annualized cash flow of 0.8 years."
Second Quarter Highlights - Second quarter production of 4,241 barrels of oil equivalent ("boe") per day exceeded guidance and represents an increase of 34% compared to the first quarter of 2007 production of 3,166 boe per day. These higher volumes were due to the commissioning of new facilities in Harmattan, and from production associated with discoveries in the Deep Basin and Granum. - ProspEx's credit facility has been expanded to $60 million from the prior level of $50 million as a result of a semi-annual review of the Company's asset base. Net debt at June 30, 2007 was $38.0 million, equivalent to 0.8 years annualized cash flow. ProspEx has an active hedging program in place, with 9,000 GJ/d of production hedged with floor prices of $7.00/GJ at AECO until October 31, 2007. This hedging program, relatively low debt levels and the expansion of the Company's credit facility provides ProspEx with financial flexibility in an environment of softening natural gas prices. - Summer drilling is planned for each of the Company's three core areas, with drilling currently underway in West Central and Southern Alberta. Drilling is scheduled to begin in the Deep Basin later in the third quarter. - Capital expenditures on exploration and development totaled $7.8 million for the quarter, with total year to date spending of $26.4 million. In the second quarter, the focus of the Company's capital program was the construction and commissioning of facilities to bring wells drilled during the winter onstream, which accounted for $3.8 million of the capital spending. In the second quarter, the Company participated in the drilling of two (0.4 net) successful wells, both in the Granum area in Southern Alberta. - Operating netbacks of $32.64 per boe increased versus the prior quarter netback of $31.12 per boe, as an 11% decrease in realized natural gas prices was more than offset by a reduction in royalty expense. - Cash flow increased 49% to $11.2 million from $7.5 million in the first quarter of 2007 driven by increased production. Year to date cash flow is $18.7 million. OPERATIONAL REVIEW Production (boe/d) Q2 2007 Q1 2007 Q4 2006 ------------------ ------- ------- ------- West Central 1,397 1,167 1,108 Deep Basin 1,713 823 913 Southern Alberta 1,122 1,162 1,131 Other 9 14 12 - -- -- Total 4,241 3,166 3,164
Second quarter production of 4,241 boe per day increased 34% over the first quarter of 2007. At Harmattan, new facilities were commissioned at the Cardium W Pool in mid-May, and production averaged 900 boe per day net to ProspEx over the balance of the quarter. Two (1.5 net) wells were drilled in the W Pool in the first quarter, and tested at gross flow rates of 600 and 900 boe per day. These wells are scheduled for tie in during the third quarter. New production from a first quarter exploration discovery was also brought onstream at Granum in Southern Alberta in late May, with 140 boe per day of production coming from two (0.4 net) wells. Two additional (0.4 net) development wells were successfully drilled in the Granum pool during the second quarter. These wells have since been completed and tested at gross flow rates of 2 to 3 million cubic feet ("mmcf") per day from each well.
In the Deep Basin, ProspEx brought a previously announced exploration discovery onstream in late March that produced at a stable, facilities constrained gross flow rate of over 16 mmcf per day (approximately 800 net boe per day) over the second quarter.
Capital expenditures for exploration and development totaled $7.8 million for the quarter or $26.4 million for 2007 year to date. Operational activity in the second quarter was focused on construction and commissioning of new facilities to bring production from the winter drilling program onstream. In the second quarter, $3.8 million was spent on facilities construction, mostly at Harmattan. Drilling activity was modest in the second quarter due to the usual "spring break-up" period, with ProspEx participating in two wells in the Granum area as discussed above.
The Company's summer drilling program is underway. In West Central Alberta, a partner operated well has been cased in the Garrington area and is awaiting completion. Company operated drilling has commenced with a step-out well to the southeast of the Harmattan Cardium W Pool. ProspEx plans to operate one drilling rig in West Central Alberta for the balance of the year. A Company operated drilling program is also underway at Medallion in Southern Alberta, where a 10 well drilling program is planned for the summer. In Granum, one well (0.2 net) has been drilled and tested an aggregate gross flow rate of 3.4 mmcf per day from two zones. In the Deep Basin, drilling is expected to begin later in the third quarter in the Kakwa area.
ProspEx's 2007 annual average production guidance remains unchanged at 4,000 to 4,200 boe per day. Operating costs are expected to average $7.75 per boe, an increase of $0.50 from the prior guidance of $7.25 per boe due to processing fees associated with the prolific Deep Basin discovery and start-up costs at the new Harmattan facility. Royalties are expected to average 17% of revenue, a significant decrease from prior guidance of 24%, as additional capital cost recovery credits received as a result of capital expenditures incurred to build production facilities in 2006 and 2007 have lowered the effective royalty rate. Expensed G&A costs are expected to be $2.00 per boe, slightly higher than prior guidance of $1.75 per boe, as the Company has added staff to facilitate the future growth of the Company. In aggregate, these changes are expected to result in an increase in netback of approximately $2.00 per boe.
2007 Guidance Summary Revised Guidance Previous Guidance Annual Average Production 4,000 to 4,200 boe/d 4,000 to 4,200 boe/d Capital expenditures $52 million $52 million Operating costs $7.75/boe $7.25/boe Royalties 17% of revenues 24% of revenues Expensed G&A $2.00/boe $1.75/boe
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