PanOcean Announces 1Q Results

Pan-Ocean Energy Corporation Limited announces its results for the three months ended 31 March 2005 (all amounts in US$). Highlights include:

    -  Operating cash flow after tax more than doubled to $12.8 million, or
       $0.53 per share from Q4 2004 with Brent crude oil averaging $47.02/bbl
       and the Company's production completely unhedged;

    -  Net profit in the first quarter was $3.9 million or $0.22 per share,
       compared to a restated loss of $2.6 million ($0.09 per share loss) in
       the previous quarter;

    -  Net working capital increased 25% to $38.4 million. Long-term debt at
       31 March 2005 was $21.5 million;

    -  Capital expenditures during the first quarter were $6.9 million
       compared with $16.0 million in Q4 2004;

    -  Production remained stable quarter-over-quarter, averaging 9,083 bopd
       in Q1 2005, Etame being down 8% and Obangue up 22% from the prior

    -  An Exploitation Permit was received at Tsiengui and work proceeded on
       installing production facilities, laying an export pipeline to Obangue
       and on contracting an exclusive rig for later in 2005;

    -  A very successful appraisal of the 2004 Koula discovery was completed
       with a 4,000 bopd production test;

    -  Appraisal drilling of the Awoun Damier discovery commenced by the end
       of the quarter;

    -  The purchase of a 25.71% working interest in two new offshore Gabon
       permits, Themis Marin and Iris Marin, was negotiated during the
       quarter; and

    -  Cash flow outlook for 2005 on 10,000 bopd to 12,000 bopd production
       range increased to $42 million to $69 million or $1.75 to $2.88
       (CDN$2.14 to CDN$3.52) per share in 2005, given Q1 results and
       assuming original oil price forecast range of $37.50/bbl to $42.00/bbl

PanOcean doubled after tax cash flow from Q4 2004 to $12.8 million or $0.53 per share in Q1 2005, and posted $3.9 million in net income or $0.22 per share for the quarter. The Company ended Q1 2005 with a very strong balance sheet having $16.9 million in working capital net of long-term debt, including $40 million in cash. Having doubled its reserves in 2004, PanOcean entered 2005 committed to turn its asset base in Gabon into significantly increased oil production and cash flow. To achieve this goal, Management developed a plan for aggressive development of PanOcean's onshore operated assets through development drilling and the construction of an export pipeline. A plan is now being implemented which has the potential to increase production, within three years, to 30,000 bopd and beyond.

On an operating level, production remained stable quarter-over-quarter, averaging 9,083 bopd in Q1 2005. Offshore, Etame production was down 8% over Q4 as the consortium adjusted individual wells to optimize performance and recovery from the field. Onshore, production volumes increased 12% over Q4 2004 as the effect of operational improvements began to show in the numbers. Production from the Obangue field increased 22% as a result of the commissioning of new production facilities, additional storage and improvements in pipeline facilities.

With oil currently behind pipe in Tsiengui, and with the potential to develop a 15,000 bopd field, the Company moved decisively in the first quarter to install early production facilities, lay pipelines and begin a development drilling program. During Q1 2005, the Company began sourcing a drilling rig which could be used exclusively by PanOcean onshore to execute the Tsiengui development drilling program. The Company expects to have a rig under an exclusive contract by the end of Q2 to ensure that the extended Tsiengui drilling program can commence in November 2005 and continue uninterrupted into early 2007.

To ensure that the pipeline is in place when production is ready to flow from Tsiengui, the Company has sufficient pipe in country, and on order, to complete an export pipeline through to unrestricted multiple export markets. Work on this began in Q1. The Company has commenced construction of the field infrastructure and begun laying an eight-inch pipeline between Tsiengui and Obangue. In order to deliver the operating results of the development plan, PanOcean has made a significant commitment to its operations. Early in the year, the Company strengthened its senior management team with the appointment of Hollis Keene as Vice President Operations.

In Awoun, adjacent to Tsiengui, PanOcean completed a very successful appraisal of the 2004 Koula discovery with a 4,000 bopd production test. To continue the appraisal of the Company's 2004 Awoun discoveries, Shell and PanOcean began appraisal drilling of the Damier discovery late in the quarter. The Company remains very optimistic about the potential of the Awoun Permit and, working together with Shell, has been moving towards drilling at least two exploration well on the property later in 2005.

The exploration model PanOcean has developed in Gabon has proven to be very successful. To add a new opportunity for growth, the Company negotiated the purchase of a 25.71% working interest in two new permits offshore Gabon, Themis Marin and Iris Marin during the first quarter of 2005. These permits lie along the fairway containing our Etame Marin Permit, and provide the Company with an additional opportunity to chase similar exploration opportunities. With this purchase, the Company committed to participate in drilling an exploration well on the Iris Marin Permit mid-year.

Management's objectives moving into Q2 and Q3 this year are to set the stage to deliver the next major increments in production. From current levels of 9,200 bopd we expect to bring on Tsiengui by early Q3, to start the long-term testing of these wells. Additional production rates will depend on spare capacity in the Avocette-to-Coucal pipeline. The next increment in production should occur with the completion of ET-6H offshore, which well should add approximately 1,250 bopd to 1,880 bopd to the Company's offshore production. With a dedicated rig commencing the balance of the Tsiengui drilling program in Q4, our challenge is to complete an export pipeline to open up the balance of the onshore production potential into 2006.



The new process facilities and expanded crude oil storage at Obangue have been in operation for the whole of Q1 2005, and the effect of the improvements has been evident in the increased production from the field. The NZOB-4H well was successfully brought back onstream in March to contribute an average of 400 bopd (370 bopd net PanOcean) to the field and production optimization work is ongoing. The Company has currently identified five in-fill producing locations for additional wells on the Obangue field. In light of the extensive development drilling program planned at Tsiengui, the Company has deferred additional Obangue development drilling until 2006, unless rig slots and export pipeline capacity become available onshore earlier.


In Q4 2004, the Company drilled and completed a 640 metre horizontal leg from the Tsiengui TST-2 well, completed 500 metres of horizontal section, and production tested the well at 2,450 bopd. Following the success of TST-2, the Company committed to a full commercial development of the Tsiengui field. The Company received an Exploitation Permit covering the Tsiengui field at the end of the quarter and development approval is expected to be received by the end of May.

During the quarter, the Company initiated a 50 km2 3D seismic acquisition program covering the Tsiengui pool. Veritas was contracted to conduct the survey, together with the logistical support from the Company. The acquisition is due to be complete mid-Q2 with final processing and interpretation completed prior to the initiation of the extended development drilling program in November 2005.

The Company is currently laying an eight-inch diameter export pipeline over a 7.4 kilometer route from Tsiengui south to the Obangue export pipeline terminal. The export pipeline is designed to have sufficient capacity to move all of the Tsiengui field's expected peak production of approximately 14,000 bopd to 16,000 bopd. The Tsiengui-Obangue export pipeline is also designed to provide PanOcean with sufficient capacity to take all of its working interest share of Awoun production in kind by way of an inter-connecting pipeline between the two permits, should the Company elect to do so in the future.

Two additional development wells, TST-3 and TST-4 are planned to be drilled by the end of Q2 and produced through the temporary production facilities. These two Tsiengui wells, together with TST-2, are planned to come on-stream by the third quarter 2005. The combined production of the Tsiengui and Obangue fields will be limited initially to 4,500 bopd (4,162 bopd net PanOcean) as a result of restrictions at the Avocette terminal, south of Obangue (see "Production Operations"). The Company is pursuing options to eliminate capacity restrictions at Avocette by having an export pipeline ultimately connected to existing pipeline infrastructure further south, such as the Total-operated Coucal facility, approximately 19 km southeast of Avocette, and/or to the Shell-operated Toucan facility further south.

The Company is currently evaluating a number of proposals to supply a drilling rig to undertake the remainder of the planned 17-well Tsiengui development drilling program, and expects to award a contract by the end of Q2 with the objective of commencing the balance of the Tsiengui drilling program by November 2005. Tsiengui development drilling is currently planned to extend through to early 2007.

Awoun - Koula, Damier

The Awoun Permit continued entirely within an exploration phase during Q1. With the completion of the appraisal drilling program on the Damier discovery in May, the Awoun partners plan to integrate the results into a revised subsurface model of the Koula and Damier fields. The co-venturers are working towards achieving internal commercial clearances with final investment decisions made in late 2005 to proceed with a full field development. Full development of these fields would entail a formal application to the government for an Exclusive Exploitation Area permit, a significant development drilling program, facilities and pipeline construction. Development of Awoun would also examine potential synergies with existing Tsiengui facilities in place at the time. By aggressively implementing its export pipeline construction from the region, PanOcean would be in a position to offer early production options to its partner in the Awoun permit.


During the first quarter, PanOcean and its co-venturers in Etame continued planning and preparations for the drilling of two wells on the Etame Marin permit during 2005, EAVSM-1, an exploration well on the South Avouma prospect and ET-6H, the fifth development well in the main Etame field. At the end of the quarter, the Company announced that the GSF Aleutian Key semi-submersible rig had been contracted to drill the two planned offshore wells. The rig arrived on site in late April and commenced drilling operations. The consortium's plan is to drill the EAVSM-1 exploration well first and then drill ET-6H in June. ET-6H is expected to come onstream by the end of July 2005. ET-6H will be subsea completed and connected to flowlines and umbilicals which were laid during the drilling of ET-5H in 2004. The total cost of drilling, completing and tieing in ET-6H is expected to be approximately $18.0 million ($5.6 million net PanOcean).


During the quarter, the Etame co-venturers were awarded an Exploitation Area surrounding the Avouma discovery made in August 2004, and including the adjacent South Tchibala prospect which adjoins the Avouma discovery. Following the award of the Exploitation Area, the Etame co-venturers finalized the development strategy for Avouma and submitted a development plan to the government for approval. Government approval of the Avouma development plan was received in April. The Avouma development plan contemplates a two-well development program with remote platform and dry tree completions. The estimated cost of the Avouma development is approximately $65 million ($20.4 million net PanOcean) for the two development wells plus production facilities and tie-back to the FPSO. The Company currently expects to spend approximately $6 million on Avouma development during 2005, primarily on the construction of the platform. Avouma is currently planned to be completed and onstream by mid-2006.


Early in the first quarter, a 696 km2 3D third-party seismic survey was completed, which extended over the northwestern portion of the Etame Marin Permit. The Etame co-venturers elected to participate in the survey to obtain approximately 336 km2 of 3D data covering the Ebouri discovery and a prospect lying west of Ebouri. The consortium currently contemplates Ebouri to be a single well development incorporating a remote platform and a dry tree, with the final scope of Ebouri to be determined after assessing the data from the 3D seismic program expected late in 2005. The total estimated cost of drilling and development as currently contemplated is approximately $35 million ($11 million net PanOcean).


Exploration work during the quarter was focused on appraisal drilling in Awoun and the acquisition of new acreage offshore Gabon, which was completed subsequent to the end of the quarter.


During the quarter, Shell and PanOcean conducted a production test of the AWOKOU-1 ST3 well on the Koula discovery made in September 2004. Over the period of a six-day test, oil rates of 4,000 bopd were produced at stable wellhead flowing pressures of approximately 640 psia on a 46/64 inch choke with a gas oil ratio of 400 scf/bbl. No water production was experienced throughout the test. Oil gravity was confirmed to be 31 degrees API with properties similar to nearby fields. Due to surface facilities limitations, the flow rate was constrained to 4,000 bopd. The results of the production test together with the success of the three-legged appraisal drilling provided the Company a high degree of confidence in the delineation of the Koula accumulation.

At end of the quarter, Shell and PanOcean began an appraisal of the Damier discovery made in November 2004. The appraisal drilling program is expected to be completed by the end of May.

Depending on the results of the appraisal, the co-venturers may elect to do a short-term production test. The estimated total cost of the appraisal drilling, well completion and testing is approximately $7.0 million ($3.5 million net to PanOcean).

Themis Marin/Iris Marin

PanOcean has been actively evaluating new exploration opportunities in Gabon, and subsequent to the end of the quarter, the Company acquired a 25.71% working interest in two exploration blocks offshore Gabon near its Etame Marin Permit. Both of the Themis and Iris permits are operated by Sterling Energy plc (20.57%), with partners Petroleum Oil & Gas Corp. (Pty.) Ltd. of South Africa (22.86%), Premier Oil plc (18.00%), and Ascent Resources plc (12.86%). The Government of Gabon has an option to back in for 7.5% in both permits.

The Themis Marin and Iris Marin Exploration Production Sharing Contracts ("ESPCs") cover two shallow water exploration permits of 902 km2 and 607 km2 respectively. Themis Marin borders on the northern edge of the Company's Etame Marin permit and Iris Marin is situated along the Gabon coast approximately 110 km northwest of the main Etame field. Both the Themis and Iris concessions are surrounded by proven oilfields, and are close to pipelines and production infrastructure. The principal target on both Iris and Themis blocks is the Gamba Sandstone reservoir, similar to that found in Etame to the south.


Production is reported prior to sales and inventories. Revenue is reported on the basis of production volumes sold, and excludes any volumes held as inventory at the end of the period. Inventory held at 31 March 2005 was 100,000 barrels of oil ("bbl") compared to 232,000 bbl at 31 December 2004. Daily production for the quarter ended 31 March 2005 averaged 9,083 barrels of oil per day ("bopd"), a decrease of 2% over the previous quarter, but a 10% increase over the same quarter in 2004. Production was split 35% onshore and 65% offshore compared to 43% onshore and 57% offshore for the same period in 2004. This reflects the natural production decline at Remboue and Obangue, as well as increased production from Etame due to the ET-5H well that was bought onstream in August 2004. All of the production was in the form of light sweet Brent quality crude oil. PanOcean currently operates all of its onshore production. The Company's average net working interest production for the quarter for each of the concessions was as follows.

                                                     THREE MONTHS ENDED
                                     Working    31 MAR     31 DEC     31 MAR
                                    interest      2005       2004       2004
    Crude oil (bopd)

    Obangue                           92.50%     2,138      1,758      2,385
    Remboue                           92.00%     1,000      1,054      1,168

    Total onshore                                3,138      2,812      3,553

    Etame                             31.36%     5,945      6,449      4,697

    Total                                        9,083      9,261      8,250


The Etame field produced a total of 1.7 million barrels (gross) of oil during the three months ended 31 March 2005, contributing an average of 5,945 bopd (net to PanOcean's 31.36% working interest), an increase of 27% compared with the 4,697 bopd produced during the same period in 2004 and a decrease of 8% over the previous quarter. The year-over-year increase in Etame is due to production added from ET-5H which was brought onstream in Q3 2004. By the end of Q1, the field has produced a cumulative of approximately 14.9 million barrels ("mmbbl") and overall, the Etame field performance has continued as predicted. The decrease in quarter-over-quarter production is principally related to adjustments to individual wells designed to optimise overall field recovery. The Etame field is currently producing approximately 18,900 bopd (5,927 bopd net to PanOcean). Five liftings were made from the FPSO during the first quarter accounting for exports of 2.23 mmbbl (0.7 mmbbl net to PanOcean).

ET-6H is still planned to be drilled during June 2005 with production expected by July. Further development drilling is planned to proceed at Avouma following government approval for the field development received during the quarter. With the addition of ET-6H, total Etame field production is expected to increase from current levels of 19,000 bopd up to approximately 23,000 bopd to 25,000 bopd (7,213 bopd to 7,840 bopd net PanOcean). In addition, the joint venture partnership has given approval to proceed with the development of the Avouma discovery following the successful Avouma EAVOM-1 exploration well which tested at 6,600 bopd. This development is planned to consist of a satellite platform tied-back to the FPSO with production from two horizontal wells and incorporating electrical submersible pumps for artificial lift.


Production during Q1 increased to 2,138 bopd, up approximately 22% over the previous quarter. This increase was mainly due to the re-instatement of production following the temporary shut-down of the field for two weeks during late November and December, plus the optimization of field production associated with the commissioning of the new production facility, additional storage and improved pipeline pigging and pumping facilities. In March, NZOB-4H was brought back into production having been shut in as a result of restrictions from the previous production facilities. Current production from Obangue is approximately 2,521 bopd (2,332 bopd net PanOcean).


Production from the Remboue field decreased 5% over the previous quarter, contributing 1,000 bopd. This reflects the natural production decline of the reservoir. With the improvement in field performance following an optimisation of the artificial lift system, the Company has continued with field optimization studies which may lead to field work later in the year.


The Tsiengui field is not yet in production. Following the successful drilling, completion and production testing of TST-2 in Q4 2004, the Company is proceeding with the installation of pipelines and facilities to enable early production from the field by the end of Q2 2005. Initial productive capacity of up to 3,000 bopd (2,775 bopd net PanOcean) will be limited by export capacity at the Avocette terminal. The operator of Avocette has advised the Company that due to operational constraints and pipeline capacity restrictions, PanOcean is currently restricted to deliver a maximum of 4,500 bopd to the Avocette terminal. This restriction will therefore limit the total combined production from the Tsiengui and Obangue fields to 4,500 bopd (4,162 bopd net PanOcean) until such a time as there is additional export capacity available from the area. See "Operational and Exploration Highlights - Production Development".


The first quarter saw the Company's net realised average oil price increase by 4% to $44.97/bbl from the previous quarter, being an average $2.05/bbl discount to $47.02/bbl Brent over the period. The net realised oil price in Q1 2005 represents a 46% increase over the same period in 2004, a result of the overall increase in world oil prices.

Obangue oil continued to be sold to Total and was priced in relation to Rabi Light at a discount of $0.40/bbl, while Remboue oil sales were to refineries in West Africa at Brent marker less $6.00/bbl to $6.50/bbl.

An agreement was reached with Etame's crude oil buyer to extend the existing crude oil sales contract for an additional year effective 1 January 2005, whereby the new marker crude oil is Rabi Blend. Etame crude oil is priced at a $1.64/bbl discount to Rabi Blend which traded at discounts of between $1.85/bbl to $3.07/bbl to Dated Brent for the first quarter of 2005. The pricing mechanism is subject to renegotiation on 1 July 2005.


Gross revenue increased 23% to $42.3 million for the first quarter compared with $34.3 million in the previous quarter. This increase reflects a 4% gain in net realised sales price together with an 18% increase in sales volume, the result of selling 132,000 bbl of oil from inventory on the Etame FPSO at the end of the quarter. Gross revenue increased 106% from $20.6 million over the same period in 2004, again reflecting both increased sales prices and increased sales volumes. Royalties as a percentage of gross revenue increased to 23% in Q1 2005, compared to 18% in the previous quarter and 8% in the same quarter in 2004. Royalties increased by 57% over the prior quarter to $9.9 million from $6.3 million, partly as a result of both higher sales volumes and a higher proportion of Etame sales, being 74% of the total export volumes during the quarter compared to 66% in the prior quarter. In addition, government take by way of Profit Oil share in excess of that applied to taxes increased as a result of lower cost recoveries, higher sales volumes and higher oil prices. The level of exports from Obangue increased by 20% over the previous quarter, but are down by 13% for the same quarter in 2004, due principally to higher quarter-over-quarter production and lower year-over-year production from the field.


Total production costs, being operating, production sharing, and transportation and selling costs, increased by 3% in the first quarter to $7.6 million compared with $7.4 million in the previous quarter. This represents an increase of 25% compared with $6.1 million in the same period in 2004, on a 42% increase in sales volumes period to period. The total production cost per barrel decreased by 12% to $8.12 in the current quarter from $9.25 in the previous quarter primarily as a result of increased sales volumes from Etame. Production cost per barrel for the same period in 2004 was $9.16 per barrel.

Operating costs of $5.4 million in Q1 remained virtually unchanged compared to the previous quarter, and increased by 36% from $4.0 million in the corresponding quarter in 2004. Per barrel operating and production sharing costs decreased by 7% to $6.89/bbl from $7.44/bbl in the previous quarter. The increase in absolute production cost as reported in the quarter is to a large extent a reflection of the 32% increase in the level of oil exported from the Etame field compared to the previous quarter and a 109% increase over the Etame exports during the same period in 2004.

Transportation and selling costs, relating entirely to the onshore fields, decreased 20% to $1.2 million for the quarter. Costs were 23% down over the same period in 2004. All the oil produced from Obangue is now exported through the Total-operated Avocette pipeline at a $2.60/bbl tariff charge. On a per-barrel basis, transportation and selling costs decreased by 32% compared to the previous quarter, to $1.23/bbl from $1.81/bbl, and by 45% from $2.25/bbl in the corresponding 2004 period. This reduction reflects the higher proportion of Etame production for which there are no transportation costs.


Pre-tax field per-barrel netbacks, being the net cash profit per barrel sold prior to hedging costs, corporate overhead and financing charges, remain virtually unchanged over the previous quarter, while the increase compared to the corresponding period last year was 31% from $18.98/bbl. This reflects the continuing higher oil prices and increased export volumes. Although transport and selling costs and operating and production sharing costs were reduced on a per barrel basis, royalties increased by 33% from $7.88/bbl to $10.50/bbl over the previous quarter, and by 323% over the same period in 2004. This reflects in part a 15% royalty that is now being applied to all Etame production, compared to 12% prior to production levels exceeding 15,000 bopd. Furthermore, Etame production accounted for 74% of total sales for the quarter compared to 66% in the previous quarter, and 50% in the corresponding 2004 period. Onshore royalties are levied at 3%. Combined with increases in government share of Profit Oil in excess of that applied to taxes, royalties and government burdens have increased to 23% of the realised oil price from 18% in the previous quarter. The decrease in transportation costs per barrel is reflective of the export mix between fields and increased export volumes, there being no transportation costs associated with the sale of Etame crude. Operating and production sharing costs per barrel decreased to $6.89/bbl, from $7.44/bbl in the previous quarter. The increase in taxation to $8.53/bbl from $7.79/bbl is again primarily a reflection of the different fiscal terms for offshore PSCs as well as the extent to which cost pools have been depleted during the period. Overall, the netback per barrel after tax decreased by 5%, from $17.07/bbl in Q4 2004 to $16.30/bbl in Q1 2005, as higher oil prices and lower production costs were more than offset by higher government take through royalties, burdens and taxes.


Gross general and administrative expenses decreased 4% in Q1 to $2.7 million over $2.8 million in the previous quarter. General and administrative expenses net of capitalised overhead increased by 10% to $2.5 million in the quarter compared to $2.3 million in the previous quarter. The main increase was in professional fees, reflecting an increase in legal and related fees during the quarter. G&A increased 17.6% over the same period on 2004 reflecting the higher levels of personnel and overhead associated with increasing operations over the period. On a per barrel basis, net G&A expenses decreased by 7% to $2.66/bbl from $2.85/bbl ($3.20/bbl in Q1 2004).


In accordance with IFRS2, Accounting for Share-Based Payments, the Company has recorded a non-cash charge of $1.8 million during the first quarter, down 25% over the previous quarter (Q1 2004 - nil). Approximately 80% of the stock based compensation expense in Q1 relates to the final portion of stock option grants made late in 2004 which became fully vested. For the balance of 2005, assuming no further option grants or changes in vesting periods, the quarterly stock based compensation expense is expected to be approximately $0.4 million.


In accordance with the application of the new standard IAS 39 Revision 1, the Company reclassified the equity component of the convertible debenture into long-term liabilities and revalued the instrument at the end of each reporting period. At the end of the first quarter the revaluation of the liability derivative created a loss of $1.4 million, compared with a loss of $0.8 million in the prior quarter and a loss of $0.02 million in the prior period. The increase in loss in each successive period is a direct result of the increase in valuation associated with the increase in the price of the underlying Class B Shares at the end of each respective period.


Interest expense of $0.3 million comprised of $0.2 million relating to the $13.5 million senior secured debt at a rate of LIBOR plus 3%, and $0.1 million interest payable in respect of the convertible subordinated debenture at a rate of 9%. Interest expense was down 5% quarter-over-quarter and up 5% from the same period in 2004. The amortisation of financing costs incurred in association with the bank facility amounted to $0.2 million. Overall, finance charges were $0.6 million, unchanged from the same period in 2004 and the prior quarter. Foreign exchange gains were $0.1 million while interest income was up to $0.2 million. Other operating income of $0.2 million in Q1 was entirely interest income on cash balances, up from substantially nil in the same period in 2004, and down from $0.5 million in Q4 2004, which period contained the remaining proceeds from insurance settlements.


Under the terms of its various PSC's, the Company is liable for taxes in Gabon, which taxes are satisfied out of a portion of the government of Gabon's share of Profit Oil. Taxation is calculated at the statutory rate on income which is taxable in Gabon as a result of activities under the PSC's. Taxation for the quarter was $8.0 million compared with $6.2 million in Q4 2004 and $2.6 million in Q1 2004. As a percentage of gross revenue, taxes increased to 19% from 18% in the previous quarter, and from 13% in the corresponding 2004 period. The increase in taxes is a direct consequence of increased crude oil prices and the fact that the shelter previously provided by cost pool balances in the PSCs has been substantially decreased, particularly at Etame. On a per barrel basis, taxes were $8.53/bbl, up 10% from $7.79/bbl in the previous quarter. For the balance of 2005, assuming a $45/bbl Brent oil price, management expects Profit Oil taxes to be approximately 20% of gross revenue. Actual taxes payable in 2005 will be a function of the prevailing oil prices, actual operating costs and the amount and timing of capital expenditures.


Depletion and depreciation expenses increased to $5.5 million in Q1 from $5.2 million in Q4 2004 and $3.6 million in Q1 2004, largely as a result of increased production and sales. On a per barrel basis, depletion and depreciation decreased from $6.55/bbl to $5.87/bbl, primarily as a result of the higher proportion of Etame sales during the quarter over Q4 2004.


PanOcean's cash flow increased by 115% to $12.8 million in Q1 2005 from $5.9 million in the previous quarter and prior period. The majority of the increase in cash flow was a result of the expiry of the Company's oil price hedges at the end of 2004, which accounted for a hedge loss of $5.3 million during Q4 2004. On a per share basis, cash flow increased by 112% to $0.53 per Class A and Class B share diluted, from $0.25 for the previous quarter.


Total capital expenditures during the first quarter were $6.9 million, a decrease of 57% over the previous quarter, and an increase of 5% from the corresponding 2004 period. This decrease in capital spending in Q1 was due to a significant reduction in drilling expenditures compared with the previous quarter which saw much higher levels of drilling activity. Compared with the first quarter of prior year, a similar level of total capital was spent in Q1 2005 with a higher component of geological and geophysical work and lower levels of drilling reflecting a different project mix over the two periods.

The major areas of expenditure during the quarter are as detailed below:



A total of $0.6 million was spent onshore Obangue, including $0.3 million on pipelines, $0.2 million on production facilities and $0.1 million geological and engineering.


In the first quarter of 2005, a total of $4.6 million was spent on the Maghena permit. Of this $1.4 million was spent on an ongoing 3D seismic survey, $0.4 million on drilling costs relating to Tsiengui development wells TST-3 and TST-4, $2.3 million on construction of an eight-inch pipeline from Tsiengui to Obangue to allow early production from TST-2, $0.1 million on geological and geophysical studies, and $0.4 million on capitalised pre-production costs.


Remboue incurred capital expenditure of $0.2 million, mainly on the refurbishment of storage tanks, development of production facilities and purchase of vehicles.



A total of $1.5 million was spent in Etame during the quarter. This was made up of ongoing costs of $0.5 million relating to the ET-6H development well, $0.6 million costs relating to the development of production facilities, including a gas lift project, $0.2 million on the Avouma EAVOM-1 exploration well and the balance on the acquisition of seismic data and the cost of further geological and geophysical studies.


There were no material additions or revisions to reserves in the first quarter of 2005.


Working capital as at 31 March 2005 was $38.4 million, an increase of 25% over 31 December 2004, and an increase of 162% over 31 March 2004.

Long-term debt outstanding at 31 March 2005 was $21.5 million. This represents $13.5 million drawn down on the senior revolving term-debt facility, of which $1.1 million before deferred financing charges has been classified as a current liability and represents a mandatory principal repayment due in June 2005 under the current borrowing base. The $8.0 million balance represents the $4.0 million principal amount convertible subordinated debenture issued in February 2004, which has been reclassified in two components as a long-term liability following the application of new standard IAS 39 Revision 1. The liability derivative component of the debenture has been revalued at the end of each reporting period, which has resulted in an increase in the reported value of the instrument.

On 31 December 2004, the Company completed an amendment to its senior secured revolving term loan facility whereby the facility was increased from $25 million (the "Facility Amount") to $40 million on substantially the same terms. The Company currently has a borrowing base of $30.0 million, of which $16.5 million is currently undrawn. Based upon the independent engineers' evaluation of the Company's reserves as at 31 December 2004, which report is summarized in the Company's Annual Information Form dated 31 March 2005, the maximum borrowing base available to the Company as at the date hereof exceeds the $40 million Facility Amount. The Company can request, at its option, to have the existing borrowing base increased to the maximum limit of the facility. Mandatory principal repayments are a function of the Company's borrowing base which varies over time.

The large increase in the overall level of trade and other receivables in Q1 2005 to $25.0 million in the first quarter over $9.9 million in the prior quarter and $14.5 million in the prior period, is as a consequence of two liftings made late in the quarter and higher crude oil prices. The Company had no contingent debt obligations at 31 March 2005.


As at 31 March 2005, the Company had not renewed its normal course issuer bid ("NCIB"). While the Company has no current intention of initiating a NCIB, the board of directors has sought approval of the shareholders to do so should market or other circumstances related to the value of the Company's shares so dictate. During the quarter, 246,666 share options were exercised at an exercise price of CDN$11.05.