Fairborne Energy Ltd. has reported an operational and financial update for the quarter ended June 30, 2008.
On June 12, 2008, Fairborne completed the acquisition of Grand Banks through a takeover bid which was financed entirely from existing credit facilities. In addition to established production of approximately 1,500 BOE per day, 35,000 acres of undeveloped land and 4.9 MMBOE of proven plus probable reserves (December 31, 2007), a key benefit of the acquisition was the establishment of a new core area in southwest Manitoba at Sinclair. Development of the assets acquired from Grand Banks has already begun, with an active 2008 drilling program and incremental capital expenditure program planned in the new area of Sinclair, Manitoba.
Fairborne continued to benefit from strong demand and increased prices for sulphur during the second quarter. Sulphur sales in the second quarter averaged 106 tonnes of sulphur per day (106 BOE per day) with realized prices as high as $415 per tonne. In addition to ongoing production, the Company is pleased to announce it has finalized the sale of the sulphur block in West Pembina where Fairborne owns approximately 210,000 tonnes of sulphur. Crushing operations have commenced with deliveries under the sales contract beginning late in the third quarter.
Completion of a flow-through equity financing in May 2008 resulted in the issue of 2.3 million common shares for gross proceeds of $28.4 million. Net debt of $188.3 million on June 30, 2008 reflected the proceeds of the equity financing offset by financing for the Grand Banks acquisition.
Strong commodity prices including sulphur sales contributed to record quarterly funds generated from operations of $51.5 million ($0.60 per share). Operating costs averaged $9.70 per BOE for the second quarter, including turnaround costs at Nevis. The Company has natural gas hedges for the remainder of 2008, with approximately 27% of forecast natural gas production volumes hedged with an average minimum price of $8.86 per Mcf.
Fairborne drilled five wells (3.8 net) during the second quarter with a 100% success rate resulting in three natural gas wells (2.1 net), one CBM well (0.7 net) and one oil well (1.0 net).
Drilling at Harlech has commenced following spring breakup with four drilling rigs currently active in the area.
To date, Fairborne has successfully completed the Jurassic Nordegg gas zones in three (2.2 net) vertical wells, and encountered the zone in five (4.3 net) other wells. These results confirm the presence of the Nordegg sand over Fairborne's extensive land position at Harlech. Based on these results, Fairborne added significant additional lands on its Nordegg play in Harlech through successful crown acquisitions during the second quarter. The Company's current land position now includes 142 gross (110 net) sections, an increase of 32% from the first quarter.
The first horizontal well in the Nordegg has been successfully drilled and completion operations are now underway. The 8-7 well was drilled to a vertical depth of 3,363m (3,496m measured depth) and cased. The horizontal section of the well was then successfully drilled with the wellbore path staying within the target 5m upper porous interval for 770m of the total horizontal length of 883m giving a total measured depth of 4,379m. This zone contained log measured average porosities of 11% with some intervals reaching 20% porosity. Planned completion operations include up to eight intervals to be fracture stimulated using multistage horizontal fracturing technology.
The Company has also drilled the third follow up well to our 2006 Belly River oil discovery at Harlech. The 5-2 well encountered a 14m thick Belly River channel with six meters of oil pay with greater than 11% porosity. This well confirms the 3D seismic model and indicates eight more development locations in offsetting spacing units. The oil from this pool is 43º API, realizing very high netbacks. There are currently three producing wells in this area and a total of three new development wells (2.3 net) are planned in 2008.
Fairborne's Deep Basin strategy is to pursue lower risk Cretaceous gas zones at Marlboro, Pine Creek and Lambert and to drill exploration wells targeting deep sour gas in the Nisku and Leduc.
The Company drilled a total of six (3.0 net) successful new gas wells in 2008. Application of mutlizone completion and production commingling has yielded strong results. Five of these wells are currently on production, one well is awaiting tie-in and the Company plans to drill up to 10 (6.4 net) wells over the balance of 2008.
The Company's 13-10 Peppers well (43.8% working interest) was successfully drilled during the quarter and encountered a full section of porous Leduc reef which was water bearing. However, a secondary zone in the Devonian was completed and has yielded strong results flowing at 4.0 MMcf per day during the flow test with increasing flowing pressure throughout the test. The flow test was conducted with a beginning pressure of 14,900 KPA and an ending pressure of 18,800 KPA. An H2S content of 40% restricted the length of the test and, as such, further testing will be required to more accurately determine the production capacity of the well.
Fairborne's coal bed methane project at Clive continues to deliver stable production. The drilling program for the second half of 2008 is currently underway with plans to drill 40 gross (28.0 net) wells by the end of the year.
Commodity prices have strengthened since the fourth quarter of 2007, resulting in much stronger cash flows than originally budgeted in the fall of 2007. As a result, the Company was again able to expand its 2008 capital program by an additional $38 million to $208 million, with the majority of the incremental $38 million being spent on the Sinclair property in southwest Manitoba.
In addition to our drilling based strategy, we continue to look at acquisitions in our core operating areas as well as opportunities in new areas that would provide for accretive production and reserve growth. As always, we continue to add undeveloped land to utilize our strong technical staff for organic growth opportunities.
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