Pegasus has filed its audited financial statements and related management's discussion and analysis ("MD&A") for the year ended December 31, 2008 on www.pegasusoilgas.com and www.sedar.com. Certain selected financial and operational information for the year ended December 31, 2008 and the year ended December 31, 2007 is set out below and should be read in conjunction with Pegasus' audited financial statements and related MD&A.
Capital expenditures for the three month period ended December 31, 2008 were approximately $2.8 million as compared to approximately $8.4 million for the three months ended December 31, 2007. The expenditures were down from the previous period because Pegasus did not drill any wells in the fourth quarter of 2008. Instead the majority of expenditures related to the building of the 12 kilometer pipeline to tie in the Company's production at Strathmore. For the year, Pegasus incurred capital expenditures of $28.5 million as compared to $27.5 million for the year ended December 31, 2007. During the year ended December 31, 2008 the Company drilled 12 gross (8.8 net) wells as compared to 28 (19.6 net) wells for the year ended December 31, 2007. The majority of the wells drilled in 2008 were at Strathmore and Crossfield which are part of the Company's central Alberta core area. The four wells drilled at Strathmore along with a Saskatchewan well were done horizontally which is why the cost per well increased in 2008.
On May 15, 2008 the Company disposed of its Whitecourt, Alberta property for $1.1 million. At the time of sale the property was producing approximately 20 boe/d.
Funds generated by operations increased 242% for the year ended December 31, 2008 as compared to 2007 mainly because production increased by 41% and commodity prices increased by 31% over 2007. For the three months ended December 31, 2008, funds generated by operations decreased 50% as compared to the previous period because of increased operating costs, interest expenses and general and administrative expenses. The operating costs were negatively impacted by a $250,000 equalization charge relating to 2007. Pegasus had positive earnings in 2007 because of the significant future income tax recovery of $5,855,000.
REVIEW OF OPERATIONS
In 2008, Pegasus drilled 12 (8.8 net) wells with a 60% success rate. Over 80% of the 'net' wells drilled during the year were exploratory wells with the majority of the drilling activity focused in the Company's core areas of Crossfield and Strathmore in Central Alberta.
Reserves increased to 2,682,000 boe total proved and 4,393,000 boe total proved plus probable representing an increase from year end 2007 of 10% and 27%, respectively. Proved reserves account for 61% of the total booked reserves. The total proved and total proved plus probable reserve life index is 11.6 years and 19.0 years respectively, based on average fourth quarter 2008 production.
No wells were drilled in the fourth quarter of 2008 as the Company focused its capital on the 12 kilometre main pipeline installation (60% WI) at Strathmore. The pipeline was commissioned and operational in early January 2009 and two additional Pekisko wells were brought on stream. The third Pekisko well has been tested at 60 boe/d (60% net) and will be considered for tie-in when commodity prices improve. The pipeline has allowed the Company to keep its 2009 first quarter field estimated production level with the fourth quarter of 2008.
Two commitment wells remain undrilled as part of the Strathmore farm-in agreement. The commitment date for these remaining wells is June 30th, 2009. Currently, five locations have been either acquired, or licensed, to facilitate the commitment timeline. Pegasus has restructured the farm-in agreement to allow for the drilling of developmental stepout wells into this play as part of the remaining farm-in agreement. Vertical wells will be targeted offsetting existing production, and along the new pipeline route, as part of the remaining commitment. Capital costs are estimated at $400,000 to evaluate a well and approximately $1.1 million to complete, equip and tie in a successful well.
In the first quarter of 2009, the Company limited capital expenditures to two well bore completions in the Redland area. Both well bore completions were part of the twelve section farm-in on freehold land in the area. The first well was successful and flow tested at 800 mcf/d (50% WI), or approximately 125 boe/d gross, from the Pekisko formation. Surface equipment is currently being installed and the pipeline infrastructure already exists to this surface location. The second well (100% WI) tested 15-25 boe/d of 30 degree API oil. Pressure transient analysis will be analyzed to determine the economic viability of equipping this well.
Pegasus has amassed a large inventory of development and infill drilling opportunities but go-forward capital spending will be limited to the remaining farm-in commitment at Strathmore to further preserve the Company's balance sheet. Additional capital expenditures will be evaluated if, and when, equity markets and commodity prices improve justifying an expanded capital program.
With the overall global economic slowdown, curtailed access to capital markets and a further decline in commodity prices, the Company will focus on balance sheet preservation, reduced capital expenditures and is currently reviewing its corporate strategy based on the current environment. The majority of Pegasus' drilling upside exists on lands with very long tenure minimizing the requirement for near term capital exposure.
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