Rock Reports Financial, Operational Results for 2008
Rock Energy Inc. is pleased to report its financial and operating results for the three month and twelve month periods ending December 31, 2008. Rock is a Calgary, Alberta, Canada based crude oil and natural gas exploration, development and production company. During 2008 Rock accomplished the following key goals:
In 2008 Rock participated in 33 (24.3 net) wells, resulting in 18 (18.0 net) heavy oil wells, 14 (5.3 net) natural gas wells and 1 (1.0 net) dry and abandoned well, for a success rate of 96 percent on net cased wells. Rock operated 24 of the 33 gross wells drilled in 2008. The 2008 drilling strategy focused on converting reserves in the proved non-producing or undeveloped and probable categories to proved producing, and increasing average daily production rates.
To date in 2009 Rock has drilled 2 (1.3 net) natural gas wells at Saxon and Elmworth, both of which were cased as natural gas wells. The Saxon well is not expected to be placed on production until next winter as the well tested at rates of 250-300 mscf per day. We will proceed with this tie-in next winter in conjunction with our other activities in this area to minimize our costs. The Elmworth well is expected to be completed and tested after spring breakup and should be on production in the third quarter of 2009.
A key accomplishment in 2008 was the $14 million spent for the construction of natural gas gathering pipelines, and compressor, dehydration and liquids-handling stations to tie-in Rock's natural gas wells at Saxon, Musreau, Kakwa and Elmworth, all of which are contributing to production and cash flow. Infrastructure ownership provides Rock with a strategic advantage in the Saxon area, allowing the Company to conclude a farm-in agreement that added two sections of land with two to three drilling locations.
Reserves and Net Asset Value
Rock increased total company reserves by 9 percent on a proved plus probable basis, to 10.2 million boe at year-end 2008 from 9.3 million boe at year-end 2007, replacing 167 percent of 2008 production. Proved-producing reserves increased by 32 percent in 2008 to 4.7 million boe versus 3.5 million boe in 2007. All-in finding, development and acquisition (FD&A) costs incurred in 2008 averaged $25.13 per boe (proved plus probable). This one-year cost is unacceptably high, but relates to the $14 million spent on infrastructure ($6.49 per boe (proved plus probable)) and a further $7.2 million spent on land and seismic ($3.35 per boe (proved plus probable)). The Company expects to increase reserve bookings with more production history from the new wells and as the full exploration cycle is completed. Rock's three-year average all-in FD&A cost was $18.24 per boe (proved plus probable), which is more representative of true full-cycle costs.
The year-end 2008 reserve report by GLJ Petroleum Consultants Ltd., using its forecasted commodity prices, indicates a value of $177.5 million for Rock's proved plus probable reserves (net present value discounted at 10 percent, before tax). Rock's net asset value is calculated at $5.96 per share (basic), assuming year-end debt of $38.6 million, land of 80,574 net acres at the acquired cost of $15.4 million, no value for seismic, and 25.9 million basic shares outstanding. This represents an increase of 13.6 percent from year-end 2007.
On a cautionary note, applying the current forward-price strip (see Table 1) to the Rock reserve base gives a lower net asset value per share of $4.50 (net present value discounted at 10 percent, before tax). To be even more conservative, the net asset value per share based on the current forward strip generates a net present value (discounted at 20 percent, before tax) of $3.04.
Rock's daily production averaged 3,436 boe per day in 2008 compared to 2,198 boe per day in 2007, an increase of 56 percent; Rock exited 2008 with average daily production of approximately 4,000 boe per day. The Company decided to reduce spending in the fourth quarter due to lower commodity prices, which led to production declining to 3,800 boe per day in January. Specifically, Rock has reduced its spending on drilling, and will refrain from working over marginal wells unless it can achieve a short-term payout at current pricing.
In 2008 Rock generated funds from operations of $40.7 million ($1.57 per share) and net income of $1.9 million ($0.07 per share). The Company had capital expenditures of $50.2 million, including a 1.2 million disposition. Total debt was $38.6 million at year-end, against bank lines of $51 million.
2009 Capital Program
Rock's Board of Directors has approved a revised capital budget of $15 million for 2009 based on a price forecast for WTI oil of US$47.00 per barrel and for AECO natural gas of Cdn$5.00 per mcf. This basic budget includes drilling 12 wells during the year to take advantage of the recently announced Alberta royalty initiatives. The remaining funds will be used to acquire seismic and land in order to expand the drilling inventory and reduce our debt levels.
Based on this forecast, Rock's production for 2009 is expected to average 3,200 - 3,400 boe per day, generating funds from operations of $17.5 million or $0.68 per basic share. Debt at year-end would be held constant at $36 million. The planned budget will be reviewed at each quarterly meeting of the Board of Directors and may be expanded if commodity prices improve.
Some of our key initiatives for 2009 include:
- Continue building Rock's inventory of drilling locations. Rock's existing core areas of West Central Alberta and Plains offer significant potential for production and reserve adds in plays that we have demonstrated an understanding of, and that can be drilled as commodity prices rise and costs decline.
- Add a new core area of operations to our existing base that can further diversify our drilling portfolio and provide top-quartile finding costs and recycle ratios.
- Deploy small amounts of capital to purchase land and seismic. This is essential to building our drilling inventory. In the current price environment, we expect to acquire land and seismic at more reasonable prices.
- Negotiate farm-in deals that do not require significant drilling commitments before 2010. Many E&P companies will be evaluating their own prospect inventories and will be seeking partners for drilling projects to preserve expiring lands and take advantage of the newly announced Alberta royalty holiday.
- Focus on operating and administrative cost reductions in all areas of operations (field and office). Improving efficiencies throughout the Company can be a low-cost way to improve overall margins for the long-term.
- Pursue corporate acquisitions and mergers that are accretive to Rock's long-term growth prospects and will provide mass and liquidity for the Company to prosper in the future.
- Pursue small asset acquisitions with our excess bank lines within our core areas. Many junior E&P companies have reached the limit of their bank lines and may be willing to sell assets to generate capital to satisfy their loan commitments.
As we enter 2009, Rock is being cautious. The Company is guarding its balance sheet, reducing its debt level, managing its cash flow and striving to capitalize on opportunities that current commodity prices present. Rock's team will continue building its drilling inventory, refine operations to reduce costs, and pursue acquisitions and mergers. In management's experience the best opportunities are captured in the dark seasons. This is a time to capture those opportunities.