Galleon's Sees Production Growth Due to Successful Drilling

Galleon Energy reports that the positive financial and operating results for Q2 2007 are a direct outcome of the significant drilling success achieved by Galleon.

Drilling activity since June 30, 2007 continues to build momentum with the addition of new discoveries. The drilling program has delivered a new deep liquids rich natural gas discovery at Eaglesham, a new Dawson Montney gas discovery located 10 miles from the existing main gas pools, and the initial completion of one wildcat light sweet oil well at Puskwa south of the main pool. In addition, two new deep light oil discoveries in new exploration areas in the Peace River arch have been drilled in third quarter 2007.

Some of the key accomplishments in second quarter 2007 include:

  • Production averaged 13,372 Boe/d, an increase of 56% from Q2 2006 and an increase of 12% from Q1 2007. Compared to Q2 2006, Q2 2007 production volumes increased as follows: light oil 89%, heavy oil 32%, natural gas 51%, and natural gas liquids 156%. This strong production growth is expected to continue in 2007 at a rate of between 5 to 15% per quarter.
  • Funds from operations were $32.8 million ($0.55 per basic share), a 49% increase from Q2 2006 and a 9% increase from Q1 2007. This increase is mainly as a result of production increases and lower operating costs.
  • Quarterly earnings were $3.3 million with 2007 earnings of $7.2 million.
  • Operating costs were $8.63/Boe, a decrease of 13% from Q2 2006 and a 3% decrease from Q1 2007. Capital investment in facilities and infrastructure in 2006 has contributed to this improved cost structure.
  • 9 gross wells were drilled of which seven (6.6 net) were cased for production including one light oil well (0.6 net), one heavy oil well (1.0 net) and 5 natural gas wells (5.0 net); resulting in a success rate of 78%.
  • Spent $23.9 million on exploration and development activities and raised $30 million in equity financing to fund the exploration program reducing bank debt to $177.9 million at June 30, 2007.

Strong production and cash flow growth in core areas

The Puskwa light sweet oil, the Dawson Montney gas and the Eaglesham oil and gas projects are delivering strong sustainable growth in production, cash flow and earnings.

At Puskwa, production averaged 2,128 BOE/d (16% of corporate production) during Q2 2007. This represents an increase of 326% from average production in Q2 2006. In Q2 2007, Puskwa generated 27% of corporate funds from operations with an operating netback of $49.78/BOE. This demonstrates the premium pricing and cost efficiencies of this project. The production rate for the second quarter reflects the rate restrictions imposed by the EUB on all but two producing wells and is not indicative of the production capacity in the area.

The drilling success and the implementation of enhanced oil recovery/waterflood projects will continue to drive the light oil production growth from Puskwa in the second half of 2007.

In the Montney gas project at Dawson, production averaged 3,826 BOE/d or 23 Mmcf/d (29% of corporate production) during Q2 2007. Year over year, this is an increase of 180%. This project made up 31% of funds from operations and had an operating netback or $32.74/BOE or $5.46/Mcf. Despite short term softness in natural gas prices, this project is delivering strong production and cash flow growth.

The combination of low operating costs and high well productivity and reserves continue to make this a profitable project for the company at natural gas prices of above $2.60 to $2.80/Mcf.

At Eaglesham, average production in Q2 2007 was 1,713 BOE/d (13% of corporate production). This compares to 150 BOE/d in Q2 2006. The operating netback for second quarter 2007 was $29.83/BOE or $4.97/Mcf. Eaglesham generated 13% of corporate funds from operations.

Puskwa operations update

To the south of the main Puskwa pool, one wildcat well (100% interest) which tested a new structure was cased on July 30, 2007. This well produced clean oil and the productivity will be assessed once completion and testing operations have ended.

In the main Puskwa light oil pool, a further development well (100% interest) has been drilled. Although completion operations have just begun, initial results indicate that this well is capable of producing oil volumes at rates similar to those of previously drilled wells in the pool. This well will initially be restricted to a EUB-imposed production volume limitation. The continued drilling success in the main Puskwa pool confirms the significant reserve accumulation of light oil from the Beaverhill Lake formation.

Two rigs are currently drilling development locations in the main Puskwa pool. Up to 4 additional wells are planned in the remainder of 2007. Galleon has access to 45 sections (100% interest except for 1 section) on the Puskwa Beaverhill Lake fairway.

Dawson Montney gas operations update

Subsequent to second quarter 2007, Galleon has successfully expanded the main fairway of the Montney gas play by drilling one well which is located 10 miles from the existing main producing area. This well tested in excess of 1.5 Mmcf/d (250 BOE/d). Galleon has access to over 537 sections of land in this play with an average working interest of approximately 90% and has identified over 300 drilling locations. Galleon has a 30 well program planned for the second half of 2007.

Eaglesham operations update

Galleon has completed testing operations on a deep gas well (65% interest) at Eaglesham. The well encountered over 100 feet of gas pay with natural gas liquids. Test rates were 4.5 Mmcf/d plus natural gas liquids of 90 Bbls/d, for a total of over 800 BOE/d of gross production. This well is expected to be placed on-stream within the next two weeks at an initial rate in excess of 2 Mmcf/d gross.

At Eaglesham, Galleon has completed another significant Cretaceous gas well (60% interest). The calculated absolute open flow potential of this well is approximately 26 Mmcf/d (4,333 BOE/d). This well is expected to be placed on production at a rate of 2 Mmcf/d gross during the third quarter of 2007.

Galleon has expanded its exploration program at Eaglesham this summer by successfully acquiring over 32 square miles of 3D seismic. The data is in the process of being interpreted. Galleon has access to over 70 sections (average working interest of 72%) of land in the Eaglesham area.

New exploration areas update

At Mcleans Creek, Alberta, one well tested at 500 BOE/d (50% interest) of light sweet oil. At Kimiwan, Alberta one well tested 200 BOE/d (55% interest) of light sweet oil. Three to four follow up locations have been identified.

Subsequent to June 30, 2007, Galleon completed an acquisition of oil and gas properties in the Eaglesham/Kakut area of Alberta for $15.1 million. This strategic consolidation acquisition further strengthens Galleon's land position and control of infrastructure in the area. Galleon continues to pursue other acquisitions which have an attractive intrinsic value and which are accretive on a cash flow and reserve basis.