Petrolifera has a significant asset base in Argentina, primarily associated with its Puesto Morales/Rinconada Concession in Rio Negro Province, Argentina. The company also owns extensive acreage under its Vaca Mahuida Concession and is scheduled to be awarded the Puesto Guevara Concession in Rio Negro Province. In La Pampa, Petrolifera holds the Governador Ayala II Concession.
During the first nine months of 2007, Petrolifera produced an average of approximately 8,400 bbl/d of crude oil and over two mmcf/d of natural gas. This was in increase of 90 percent over 2006 levels. During this period, Petrolifera invested approximately C$47.4 million in Argentina, primarily in Rio Negro Province and has budgeted to drill 25 new wells in the fourth quarter of 2007 and has four rigs and four service rigs currently working on its Puesto Morales/Rinconada acreage. Total capital investment for the fourth quarter of 2007, including for drilling and for facilities, which are under construction or being completed, has been established at C$45.5 million.
This would bring the companies total investment for calendar 2007 to approximately C$92.9 million, considerably in excess of anticipated cash flow from operations before working capital changes ("cash flow") for the period. The company's capital budget for Argentina in 2008 was recently established at $76 million, with 69 wells and extensive seismic programs scheduled. The decline from anticipated 2007 levels primarily relates to the pending completion of the company's permanent production facilities.
Since it embarked on its original drilling program at Puesto Morales in late 2005, Petrolifera has made a number of significant new discoveries. The company has since its formation drilled approximately 60 wells in Argentina, with only one dry hole and one suspended well. Several new pool discoveries have been made and the company has produced over four million barrels of crude oil, all found through the drill bit. Capital investment in Argentina since 2005 has thus far totaled $90 million through September 30, 2007 and as indicated, planned fourth quarter 2007 expenditures are $45.5 million with an announced 2008 budget of $76 million. In addition to this capital investment, Petrolifera has paid almost $30 million of royalties to the Province of La Pampa and has paid over $40 million of cash income and other taxes to the Government of Argentina.
Yesterday, in announcing two new discoveries and a new zone completion on its Puesto Morales Concession, Petrolifera commented that in light of the recent proposed increase in Argentina's export tax on crude oil, which could adversely but minimally impact on the company's anticipated 2008 cash flow, it would be "reexamining its previously announced capital budget to determine which, if any, of its anticipated 2008 Argentinean projects will have to be deferred or eliminated due to the lower level of anticipated cash flow relative to its actual and forecast sales levels anticipated to be achievable during the year."
It should be noted that in 2007 year to date, the average price received by Petrolifera for its oil production was under C$46.00 per barrel, already constrained by the impact of the prevailing export tax. The new indicated ceiling of US$42.00, when adjusted for tax and royalty effects, gives rise to the previously forecast reduction in cash flow for an assumed 10,000 bbl/d sales level, and the investment community seems concerned that the new level of export tax does appear to limit the potential for realizing a portion of increases to the world price for crude oil sales during a time when cost pressures could emerge in conducting field and other business activities.
Petrolifera wishes to clarify that a reexamination of spending plans should be considered to be in the ordinary course of business, as policy changes such as the proposed increase in the export tax in Argentina impact on available cash flow and also on prospective returns from reinvestment activity. However, such a reexamination does not infer withdrawal or in fact a cancellation or reduction in planned activity.
While the company does also have cash balances and an essentially unutilized US$60 million available credit facility to supplement cash flow in its operations in financing its capital programs, cash flow from operations remains the principal source of funding for new investment activity for most oil companies.
To reiterate, Petrolifera in no way stated that it was withdrawing from Argentina or was otherwise curtailing its planned activity, but merely stated that it would be "reexamining" its budgeted activity in light of the announced policy changes. With four rigs and four service rigs currently active in Rio Negro Province and a 3D seismic program underway in La Pampa Province, Petrolifera is among the most active operators in Argentina and has become one of the largest landholders and among the ten largest producers and operators in Argentina, all achieved during the past two years. Such a level of commitment and achievement is hardly reflective of an intention to withdraw from the country and Petrolifera's position has been miscast in the media and popular press.
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