Far East Energy Reports 32% Increase in Proved Reserves at Shouyang Block

Far East Energy Corporation, the U.S. listed company that operates the Shouyang Block Coalbed Methane (CBM) Production Sharing Contract (PSC) in Shanxi Province, People’s Republic of China reported Tuesday that the maturity date of the existing bridge facility with Standard Chartered Bank (SCB) has been extended to July 15, from the previous date of April 15. 

In connection with the release of its 2013 results, the Company announced the results of its updated SEC reserve report prepared by the independent petroleum engineers, Resource Investment Strategy Consultants (RISC).  As of Dec. 31, 2013, the Company had estimated net proved gas reserves of 67.5 billion cubic feet (Bcf), an increase of 32 percent over last year’s net proved gas reserves of 51.3 Bcf. This increase reflects the results of the 2013 drilling program, specifically in the 1H Pilot Area, which is the core gas production zone for the Company and, hence, provides the ability to upgrade reserves to the Proved from the Probable category. The increased reserve figures, together with the higher gas prices now being received (2014 price of approximately $9 per thousand cubic feet) have combined to drive an increase in the value of the block. The net present value of future cash flows discounted at 10 percent (NPV10) for the Proved and Probable (2P) reserves is now $1.4 billion (up 73 percent compared to the same period last year).

Commenting, CEO Mike McElwrath said, "It is gratifying that the work that went in on the Shouyang Block during 2013 has resulted in a significant increase to SEC Proved reserves. I think it's also important to remember that these reserves are still based on the evaluation of only a portion of the block, which implies significant upside potential for our reserves."

As a result of the 2013 drilling and fracing program, gas production from Shouyang has risen significantly in recent months. During the first quarter of 2014, FEEC produced a total of 175.5 million cubic feet (MMcf) of gas, up 96 percent compared to the same period in 2013. 

The 2013 Form 10-K has been filed with the SEC, is available on our web site, and includes the following relating to our reserves:

The Year End 2013 Reserve Report prepared by RISC, evaluates, as of Dec. 31, 2013, the estimated proved, probable and possible coalbed methane gas reserves attributable to the three (3) target coal seams (#3, #9 and #15) in Far East Energy’s Shouyang Block, Shanxi Province, PRC.

The reserve estimates have been prepared in accordance with definitions and regulations of the U.S. Securities and Exchange Commission (SEC) and the FASB Accounting Standards Codification Topic 932, Extractive Industries-Oil and Gas with the exclusion of future income tax and Chinese VAT. RISC’s estimates of Proved, Probable and Possible follow:

Net Reserves

• Total Proved: 67,501 MMscf
• Total Probable: 372,418 MMscf
• Total Possible: 109,378 MMscf

Future Net Revenue ($ Million)

• Total Proved: 343.5 (Undiscounted); 167.3 (10 percent discount)
• Total Probable: 2,254.8 (Undiscounted); 1,242.9 (10 percent discount)
• Total Possible: 873.3 (Undiscounted); 563.1 (10 percent discount)

Notes:

• Totals may differ due to rounding
• Gas volumes are expressed in units of million standard cubic feet at reference conditions of 60 degree F and 14.696 psia
• Net Gas Reserves are net of CUCBM participating interest and COP revenue interest

The standardized measure of discounted future net cash flows for proved oil and gas reserves is $151.8 million and the NPV10 valuation for proved reserves is $167.3 million, while the combined 2P (proved and probable) NPV10 valuation for these reserves is $1.4 billion. Adding in the NPV10 value of the possible reserves would take the total 3P value to $2.0 billion. 

Additional Information Regarding Estimates of Reserves

NPV10 and the standardized measure of discounted future net cash flows do not purport to be, nor should they be interpreted to present, the fair value of the coalbed methane reserves of the Shouyang project. An estimate of fair value would take into account, among other things, the recovery of reserves not presently classified as proved, the value of unproved properties, and consideration of expected future economic and operating conditions.

Estimated future production of Proved Reserves and estimated future production and development costs of Proved Reserves are based on current costs and economic conditions. Future income tax expenses are computed using the appropriate year-end statutory tax rates applied to the future pre-tax net cash flows from proved coalbed methane reserves, less the tax basis of Far East Energy. All wellhead prices are held flat over the forecast period for all reserve categories. The estimated future net cash flows are then discounted at a rate of 10 percent.

NPV10 for proved reserves may be considered a non-GAAP financial measure as defined by the SEC and is derived from the standardized measure of discounted future net cash flows for proved reserves, which is the most directly comparable US GAAP financial measure. NPV10 is computed on the same basis as the standardized measure of discounted future net cash flows for proved reserves but without deducting future income taxes. As of Dec. 31, 2013, our estimated discounted future income taxes were $15.5 million and, accordingly, our standardized measure of after-tax discounted future net cash flows for Proved Reserves was $151.8 million whereas our NPV10 was $167.3 million. We believe NPV10 is a useful measure for investors for evaluating the relative monetary significance of our coalbed methane properties. We further believe investors may utilize our NPV10 as a basis for comparison of the relative size and value of our proved reserves to other companies because many factors that are unique to each individual company impact the amount of future income taxes to be paid. Our management uses this measure when assessing the potential return on investment related to our coalbed methane properties and acquisitions. However, NPV10 is not a substitute for the standardized measure of discounted future net cash flows. Our NPV10 and the standardized measure of discounted future net cash flows do not purport to present the fair value of our proved coalbed methane gas reserves.

NPV10 for probable and possible reserve amounts above represent the present value of estimated future revenues to be generated from the production of probable or possible reserves, calculated net of estimated lease operating expenses, production taxes and future development costs, using costs as of the date of estimation without future escalation and using contracted prices and 12-month average exchange rate, without giving effect to non-property related expenses such as general and administrative expenses, debt service and depreciation, depletion and amortization, or future income taxes and discounted using an annual discount rate of 10 percent. With respect to NPV10 amounts for probable or possible reserves, there do not exist any directly comparable US GAAP measures, and such amounts do not purport to present the fair value of our probable and possible reserves.