MegaWest Suspends All Heavy Oil Projects in Missouri, Evaluates Options

MegaWest Energy has provided a corporate update to shareholders along with filing its second quarter interim financial statements and management's discussion and analysis on SEDAR's website at


We are pleased to report that MegaWest Energy has achieved a number of significant milestones in the quarter ended October 31, 2008. It has increased its leased acreage in Missouri/Kansas, Kentucky and Montana to over 110,000 net acres. More specific project milestones are as described below:


Oil sales from the Marmaton River Project (Phase I) commenced in August 2008. The construction and commissioning of the Grassy Creek Project was completed on schedule and within budget in October 2008. As the Marmaton River Project reservoir began to respond to steam injection, production ramped up to average over 100 barrels per day in November. This was at the upper end of reservoir simulation predicted performance for that point in time. The reservoir simulation predicts that these wells would reach 300-500 barrels a day of production with continued operations. Initial indications of reservoir performance at Grassy Creek were better than those achieved at Marmaton, consistent with the better reservoir quality and thicker oil pay zone.


Design of the Green River Demonstration Project was completed, with all regulatory applications submitted and major equipment purchased for a planned construction start in early 2009. The Company farmed out 4,300 acres on the western flank of its acreage for New Albany Shale gas testing, retaining a 34.75% working interest. Two wells have been drilled and logged and are awaiting fracturing and flowrate testing.


2-D seismic over the Teton and Loma prospects was acquired and processed. The Company committed to the Devils Basin prospect and purchased trade seismic for reprocessing and interpretation.


The current weakness in global oil prices and the world-wide collapse of both the capital and credit markets over the past few months has, however, necessitated that the Company undertake an in-depth technical and economic review of all of its projects. As a result, the Company has recently taken the difficult decision to suspend steaming operations in Missouri pending a recovery in oil prices. The Company has also suspended all capital projects and put a hold on all discretionary spending.

The Company-wide review is ongoing with staff Teams concentrating on the following:

  • A Technical Team is evaluating and documenting all project opportunities and upsides and putting together data room type documentation to support possible asset sales, farm-outs, or industry joint venture opportunities;
  • An Operations Team is evaluating restart options for Marmaton River and Grassy Creek including gas price contract, oil pricing, alternative fuels, alternative technologies, and operating cost reductions; and,
  • A Strategic Team is evaluating corporate strategic alternatives including new funding alternatives, property sales or farm-outs, corporate transactions, and overhead cost reductions.

The overall goal of these actions is to maintain a positive cash balance through 2009 and to be in a position to aggressively restart operations once world markets stabilize and oil prices improve.

Another result of the current state of the oil markets is that the Company has recognized a substantial impairment in its carrying value for some of its oil and gas assets.

Despite the current, temporary weakness in the oil market, MegaWest continues to believe that heavy oil will inevitably become an even greater component of total oil production as supplies of light oil become harder to find and more costly to produce. Proposed royalty increases by the Alberta government and high construction costs will negatively impact future production growth from the Canadian oilsands.

More specifically, we believe that the Company's focus on the acquisition and development of known significant heavy oil resources within the United States is a viable longer term strategy for the Company. Relative to the oilsands, MegaWest's projects should benefit from higher field-gate pricing, closer proximity to markets, lower construction costs, shorter permitting turnarounds and lead time to production, and the ability to manage capital exposure through a staged, modular development approach.

The dedication and commitment of MegaWest's staff during these difficult times has been admirable and is greatly appreciated.

We expect that 2009 will bring a return to more predictable financial markets and a strengthening oil price such that the real value in MegaWest's projects can begin to be realized. MegaWest is taking and will take every opportunity to ensure that the Company emerges from these trying times in a position to capitalize on the capability of its personnel and the quality of its heavy oil properties.