Oilexco: Finished 3Q06 in Excellent Condition


Oilexco Incorporated ("Oilexco") (TSX, AIM: OIL) announces its third quarter results for the period ending September 30, 2006.

Oilexco's primary focus during the third quarter remained the Brenda/Nicol Field development (Block 15/25a) located in the UK Central North Sea. This phase consisted of the drilling and completion of one horizontal production well. This well 15/25a-N1w, flowed oil at a maximum rate of 10,165 bbl/d, through a 70/64" choke, at 505 psi flowing tubing pressure. The estimated well flow rate, normalized to an approximate 8% reservoir drawdown, approximates an oil flow of 12,000 bbl/d. All oil recovered was 40 degrees API sweet crude consistent with oil recovered on previous Nicol flow tests. Oil flow rates were restricted by the test equipment utilized and government mandated oil volume burn limit regulations. No water or sand was produced in the flow test.

The Brenda manifold containing the sub-sea pump and control mechanism was successfully lowered to the sea bed, as was the Nicol control mechanism. Sub-sea pipelining from the Nicol Field to the Brenda manifold (10km), and from the Brenda manifold to the Balmoral production facility (8 km) was also completed over the end of the period. The final phase of the sub-sea installation was interrupted by strike action taken by UK North Sea divers on October 31, 2006. This labour dispute suspended operations at Brenda/Nicol at a time close to completion of the sub-sea installation phase. Settlement of the strike occurred on November 10th. The resolution of the labour action did not result in an immediate resumption of sub-sea saturation diving operations. This was due to the procedures of initiating a saturation dive operation and sea conditions in the North Sea. The revised estimate for initial production from Brenda/Nicol is now therefore estimated to be late November to mid December, assuming there are no protracted weather delays.

At the end of the third quarter, the Company completed appraisal drilling on its 65% owned Sheryl oil accumulation located in Block 21/23a. This phase of appraisal drilling, which commenced in early August and ended in October, consisted of 7 well penetrations from a single surface well bore. The last well bore was drill stem tested through sand screens under "open-hole" conditions. Oil flow during the test was recorded at a maximum rate of 1,915 barrels per day through a 36/64" choke at 334 psi flowing pressure. Oil flow was restricted by sand production throughout the flow period as a result of a damaged sand screen. The quality of oil was 23 degrees API which is consistent with other oil accumulations in the area. Oilexco now considers the Sheryl oil accumulation close to being fully appraised. At present field development options are being evaluated. Oilexco will make a decision regarding the timing of a possible field development after it reviews the development options and completes its 2006 appraisal/exploration program.

Subsequent to the end of the quarter, appraisal drilling operations commenced at Shelly (100% working interest) located in Block 22/2b. This program will appraise a 1984 oil discovery which tested 2,414 Bbls of oil per day from the Paleocene Forties Sand. Several well bores drilled at high angles, drilled from a single surface well bore will evaluate this oil accumulation. After completion of operations at Shelly, expected in late November, appraisal drilling operations will commence at the Company's 50% owned Kildare project located in Block 15/26b. Drilling operations at Kildare will be operated by Oilexco utilizing its long term contracted semi-submersible the Transocean Sedco 712. A single well bore is planned to be drilled to appraise a 1988 oil discovery which tested 2,650 Bbl oil per day from Upper Jurassic Ettrick sands. As well, the well bore will target underlying Upper Jurassic Tweedsmuir sands which were not present in the 1988 discovery well.

For 2007, Oilexco's Board of Directors has approved a capital budget of $410 million. These funds will be used on new field development projects as well as the Company's on-going appraisal and exploration program. The development projects are currently unidentified but will be identified after the completion of the 2006 appraisal program. The 2007 appraisal program will commence in the first quarter with drilling at Laurel Valley and Huntington. Laurel Valley is an exploration prospect located on Blocks 14/23, 14/28 and 14/29 in the Outer Moray Firth area of the UK Central North Sea approximately 70km west of the Company's Brenda Field. This is a farm-in whereby Oilexco is paying 75% of the drilling costs to earn a 45% working interest in the prospect lands. The Company is the designated operator of the project and the majority equity holder in the property. Drilling operations are targeting oil in a deep water stratigraphic trap similar to the Scapa and Buzzard discoveries.

At the Huntington prospect located in Block 22/14 in the UK Central North Sea, Oilexco will be the operator and majority equity holder. This is also a farm-in opportunity whereby the Company will pay 53.3% of drilling costs to casing point and historical seismic costs to earn a 40% working interest in the prospect lands. Oil in Paleocene Forties and Jurassic Fulmar sands associated with a large salt cored structure are being targeted by this well. The property is located approximately 60km southeast of the Brenda Field and is situated between two previous oil discoveries, the Forties Montrose and Everest fields. Activities on Huntington are expected to begin in the first quarter after completion of operations at Laurel Valley.

Oilexco finished the third quarter of 2006 in excellent financial condition. The Company had significant cash balances as at September 30, 2006 as a result of an equity financing that closed in December 2005 and withdrawals from the RBS loan facility. Capital assets increased from $197.0 million at December 31, 2005 to $424.0 million at September 30, 2006 as a result of drilling three exploration wells, five production wells and additions to the subsea equipment for the Brenda and Nicol development as well as drilling six exploration wells for Sheryl prospect. Current liabilities increased from $41.9 million at December 31, 2005 to $63.7 million at September 30, 2006, represented by a $35.5 million increase in accounts payable and accrued liabilities, and a $13.6 million decrease in the current portion of the bank loan (due to repayment of the Bridge Facility that was replaced with long-term senior debt from RBS). The long-term debt as at September 30, 2006 amounted to $170.4 million and relates to the Senior Facility. The Company expects its bank indebtedness to increase by the end of 2006 up to approximately $260 million. Net working capital was approximately $26.9 million as at September 30, 2006 compared to $89.1 million at December 31, 2005. The increase in share capital of approximately $13.3 million represents funds obtained from warrants and stock options exercised in the first three quarters of 2006. The Company's 2006 UK North Sea exploration and appraisal drilling program will be fully funded by its cash reserves. The Brenda/Nicol development is funded by the Senior Facility from RBS.

Operating results for three and nine months periods were lower in 2006 compared to same periods of 2005. The decrease in UK production was a result of maintenance work completed on the Balmoral facility; however increased oil prices helped offset reduced production. The price received for UK oil production for the third quarter of 2006 averaged $69.57 per barrel compared to $61.89 for the same period in 2005. Total operating costs and operating costs per barrel at the Balmoral facility were significantly higher for the three and nine months of 2006 compared to same periods of 2005. The increase in the operating costs was due to the decreased production in 2006 and scheduled maintenance of the facility. The per unit operating costs will decline when the Brenda/Nicol production begins later in the fourth quarter of 2006.

General and administrative expenses increased for nine months of 2006 compared to 2005 because of continued increase in staffing levels in both Oilexco's head office in Calgary and its wholly owned subsidiary in Aberdeen. The additional expenses are a result of salaries, support and activity required for the Brenda/Nicol development and the ongoing exploration and appraisal drilling program. General and administrative expenses decreased in the third quarter of 2006, compared to the same period of 2005 because a significant amount of these expenses was charged back as a result of jointly funded projects. A stock-based compensation expense of $8.3 million was recognized for the nine months of 2006, which amounted to $10.2 million in the same period of 2005. The Company continues its compensation policy of combining share options with competitive salaries and benefits packages in order to attract the best qualified staff.

As part of its loan facility agreement with RBS, the Company participated in commodity contracts that involve a costless collar agreement to secure the Company's future cash flow by eliminating its exposure to oil prices below $40 per barrel for a portion of the anticipated production from Brenda and Nicol. As a result of higher oil prices at September 30, 2006 compared to those of January 25, 2006, the date at which the commodity contracts were signed, the Company recorded an unrealized loss of $6.7 million in its financial statements for the nine months ended September 30, 2006. The unrealized gain of approximately $12.0 million recognized for the third quarter of 2006 resulted from a mark-to-market valuation being significantly higher on June 30, 2006 than on September 30, 2006 due to oil price fluctuation. These are non cash items. The commodity contracts will not have a negative impact on the Company's cash flow unless the price of dated Brent exceeds a monthly average of $88 per barrel during the life of the commodity contracts.

The Company experienced net earnings of $4.7 million for the third quarter of 2006 compared to a $10.5 million net loss for the corresponding period in 2005. The net earnings in the third quarter of 2006 resulted mainly from the recognition of the unrealized gain on derivative contracts of approximately $12.0 million offset partially with interest expense of approximately $3.5 million and foreign exchange loss of approximately $2.3 million. Additionally, the net loss in the third quarter of 2005 included stock-based compensation expense of $9.4 million.