Pegasus Oil & Gas announces results for second quarter of 2008



    
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    (Stock Symbol "POG.A & POG.B" - TSX Venture Exchange)

    CALGARY, Aug. 28 /CNW/ - Pegasus Oil & Gas Inc. ("Pegasus" or the
"Company") is pleased to announce a successful second quarter with increased
production and cash flow from operations and an expanded drilling inventory.
The Company has filed its unaudited financial statements and related
management's discussion and analysis ("MD&A") for the three and six months
ended June 30, 2008 on www.pegasusoilgas.com and www.sedar.com. Certain
selected financial and operational information for the three and six months
ended June 30, 2008 and the 2007 comparatives are set out below and should be
read in conjunction with Pegasus' financial statements and related MD&A.

    
    OPERATIONAL AND CORPORATE HIGHLIGHTS

    -   First half 2008 drilling program resulted in the drilling of 7 gross
        (4.8 net) wells with a 89% success rate

    -   Q2 2008 production of 609 boe/d increased 29% over Q2 2007 production
        of 472 boe/d

    -   Q2 2008 cash flow from operations increased to $2.1 million up 252%
        over Q2 2007 cash flow from operations of $0.6 million

    -   Exited Q2 2008 with a working capital deficiency of $0.4 million with
        no bank debt and a credit facility of $17.4 million

    -   Drilled a Basal Quartz/Ellerslie well at Crossfield in Q2 2008 which
        is now producing approximately 125 to 150 boe/d net to Pegasus

    -   Drilled an additional Pekisko horizontal well on the 193,000 acre
        strategic 'freehold' farm-in in the Crossfield area, with 5 of the 7
        farm in wells drilled to date

    -   Amassed a large drilling inventory of 35-50 potential locations
        (average 70% WI) in the Crossfield and Strathmore areas

    -   Divested 20 boe/d of non-core production at Whitecourt, Alberta for
        $1.1 million


    FINANCIAL AND OPERATIONAL SUMMARY

    -------------------------------------------------------------------------
                                  Three months            Six months
                                  ended June 30          ended June 30
    -------------------------------------------------------------------------
                                    2008        2007        2008        2007
    -------------------------------------------------------------------------
    Financial ($000s except
     per share amount)
    Petroleum and natural gas
     sales                         3,899       1,937       7,018       3,380
    Cash flow from operations
     (Note 1)                      2,111         599       3,595       1,052
      Per basic share               0.05        0.02        0.10        0.04
      Per diluted share             0.05        0.02        0.10        0.04
    Net earnings (loss)              114        (709)       (276)     (1,305)
      Per basic share               0.00       (0.03)      (0.01)      (0.05)
      Per diluted share             0.00       (0.03)      (0.01)      (0.05)
    Net capital expenditures       5,165       3,734      13,659       7,941
    Working capital (deficiency)    (445)      3,489        (445)      3,489
    Shareholders' equity          62,673      38,561      62,673      38,561
    Shares outstanding
      Class A                     34,500      23,940      34,500      23,940
      Class B                      1,012       1,012       1,012       1,012
      Options                      2,843       2,220       2,843       2,220
    Basic shares (weighted)
     (Note 2)                     39,690      26,111      37,457      25,045
    Diluted shares (weighted)
     (Note 2)                     39,937      26,111      37,457      25,045
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Operating
    Average daily production
      Natural gas (mcf/d)          2,965       2,579       3,136       2,170
      Crude oil (bbls/d)               9           5           6           8
      NGLs (bbls/d)                  106          37          95          38
      Barrels of oil equivalent
       (boe/d)(Note 3)               609         472         623         407
    Average selling price
      Natural gas ($/mcf)          10.52        7.31        9.35        7.43
      Crude oil ($/bbl)           104.63       53.84       97.64       50.06
      NGLs ($/bbl)                101.17       58.28       91.17       56.82
      BOE ($/bbl)                  70.35       45.12       61.85       45.84
    Netback per BOE (6:1) ($)
      Petroleum and natural gas
       sales                       70.35       45.12       61.85       45.84
      Royalties                   (11.03)      (7.38)      (9.25)      (7.34)
      Operating costs             (12.74)     (11.74)     (12.77)     (11.79)
      Transportation costs         (1.06)      (1.28)      (1.02)      (1.25)
      Operating netback            45.52       24.70       38.81       25.45
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Note 1:   Management uses cash flow from operations (comprised of cash
              flow from operating activities before changes in non-cash
              working capital) to analyze operating performance and leverage.
              Cash flow from operations as presented does not have any
              standardized meaning prescribed by Canadian GAAP and therefore
              it may not be comparable with the calculation of similar
              measures for other entities.
    Note 2:   Class B share conversion: June 30, 2008 @ $1.95/share;
              June 30, 2007 @ $2.68/share
    Note 3:   References in this report to boe refer to barrel of oil
              equivalent whereby natural gas volumes have been converted at a
              rate of 6 thousand cubic feet of natural gas to 1 barrel of
              oil.
    

    Operations Overview

    During the first half of 2008, Pegasus drilled 7 (4.8 net) wells with an
89% success rate. Two additional Strathmore wells (2.0 net) were drilled and
tested prior to break-up. The Strathmore Pekisko 09-03 horizontal leg (1.0
net) was re-drilled and flow tested in the second quarter. The fifth
Strathmore earning well (1.0 net) commenced drilling in July and completion
operations are currently in progress. At Crossfield, the 16-12 (0.8 net) well
was drilled and successfully tested as a dual zone Basal Quartz/Ellerslie
producer in the second quarter. At Chigwell, 2 (0.5 net) successful CBM wells
were drilled. The exploration well (0.5 net) at Chinchaga was dry and
abandoned.
    At Strathmore, four of the seven well farm-in commitment wells have now
been drilled and tested. The combined test rates from the three successful
wells is 450 boe/d (270 boe/d net) with one well deemed non-commercial. These
flow rates include test results from the 09-03 well which was tested in July.
The 09-03 well encountered liner integrity problems that required Pegasus to
re-drill the horizontal leg in order to obtain commercial rates of production
for the 09-03 well. The fifth Strathmore exploration well (earning well)
commenced drilling in July and completion operations are currently underway.
    The drilling commitment for the remaining two Strathmore farm-in wells
has been extended into the first quarter of 2009. The Company has the option
to extend the farm-in on freehold land after the initial farm-in agreement
commitment phase is completed and the wells have been evaluated.
    The pipeline and tie-in operation for the 03-19 Pekisko well has
commenced and the well is expected to be on production in October 2008. Net
production of 80-100 boe/d is anticipated from this well. The main 12
kilometer pipeline to tie-in the remaining Pekisko volumes is progressing
favourably with approximately 75% of the required pipeline easements acquired.
Production volumes from the Strathmore wells are anticipated to be on stream
in the fourth quarter 2008.
    During the quarter, the Company drilled the Crossfield 16-12 well and
encountered pay in both the Ellerslie and Basal Quartz zones. The Ellerslie
and Basal Quartz zones were fracture stimulated and tested independently
yielding commercial gas rates from both zones. The well flow tested at a
combined rate of 125-150 boe/d net to Pegasus. The well has been tied-in and
initial volumes brought on stream August 24th.
    Commingling of the Crossfield 01-02 Ellerslie and Basal Quartz zones was
approved by the EUB in mid-August. Both zones are now producing with a net
increase of 35 boe/d.
    During the second quarter, the Company sold approximately 20 boe/d of
non-core production at Whitecourt for $1.1 million effective May 15, 2008.
    Production for the second quarter of 2008 averaged 609 boe/d, a 29%
increase over the second quarter of 2007. Production for July 2008 averaged
635 boe/d based on field sales estimates. The Company has behind pipe volumes
of approximately 475-500 boe/d for wells that have been tested to date. This
estimate includes the volumes associated with the Crossfield 01-02 commingled
zones and the Crossfield 16-12 well which were brought on stream in August
2008. As previously indicated in the first quarter update, production will
remain relatively flat in the third quarter since the behind pipe volumes
associated with the Strathmore exploration program require a 12 kilometre
pipeline installation to bring these wells into production.
    Pegasus is continuing discussions with the operator of the Balzac gas
plant regarding the Crossfield gas plant volume allocations. A production
audit is scheduled for the fourth quarter of 2008 to help resolve this issue.
At this time, Pegasus does not know what, if any adjustments will be made to
its gas sales volumes for 2007 and 2008.

    OUTLOOK

    The Company continues to focus on its large freehold farm-in agreement at
Strathmore and continues to exploit the Ellerslie and Basal Quartz formations
at Crossfield. Pegasus has already earned in 25 gross sections of land (60%
WI) by drilling and completing the first 5 wells at Strathmore. The Company
has the opportunity to earn an additional 4 to 10 gross sections of land
depending on Pegasus' election to drill the remaining two commitment wells as
either vertical or horizontal wells. This, coupled with the ability to extend
the drilling program into the option phase of the farm-in period and the
proximal nature of the land base offsetting the Company's Crossfield Ellerslie
and Basal Quartz exploration and development success experienced to date, has
positioned the Company with a sizeable core area.
    During the third quarter, Pegasus will also evaluate multi-stage fracture
stimulation technology on the 12-35 Pekisko well to determine if this
completion technique will enhance stimulation of the Dolomite reservoir
resulting in higher deliverability rates.
    A farm-in to a twelve section freehold land base in the Redland, Alberta
area was initiated in the second quarter of 2008. Pegasus has made a one well
drilling commitment targeting the Pekisko formation. Approximately 200 miles
of 2D seismic and 90 square miles of 3D seismic are available to Pegasus for
review pursuant to the farm-in. Geophysical interpretation by Pegasus is
ongoing and the initial well is anticipated to commence drilling in the fourth
quarter of 2008.
    Following the success of the Crossfield 16-12 well, the Company plans to
drill two additional Crossfield Basal Quartz/Ellerslie wells in the third and
fourth quarters of 2008. Drilling locations have been identified and surface
land acquisition is currently underway. The 16-15 location is expected to
commence drilling in mid September.
    The Company continues to expand and refine its large drilling inventory
of 35-50 (average 70% WI) development and exploratory locations targeting the
Basal Quartz, Ellerslie and Pekisko formations, with a focus on long-life
reserves on lower royalty freehold lands.
    Pegasus has increased its capital budget for 2008 to approximately
$26 million up from $22 million that would result in the drilling of
approximately 12 (9.3 net) wells. With an undrawn $17 million line of credit,
Pegasus will be able to execute the 2008 capital program and exit the year
with a strong balance sheet.
    Pegasus continues to pursue its large drilling inventory, and with the
ability to further expand a concentrated land base focused on quality reserves
and a respectable balance sheet, the Company is positioned for continued
growth in 2008 and into 2009.

    As referred to above, to view Pegasus' unaudited financial statements and
related MD&A for the three and six months ended June 30, 2008 please visit
www.pegasusoilgas.com or www.sedar.com. To the extent investors do not have
access to the internet, copies of the unaudited financials and related MD&A
can be obtained on request without charge by contacting Pegasus at (403)
521-5282 or at 101 10th Street NW, Calgary, Alberta T2N 1V4.
    The Company currently has 34.50 million Class A and 1.012 million Class B
Shares outstanding.

    Forward-looking statements - This document contains forward-looking
statements. More particularly, this document contains statements concerning
the Company's planned exploration and development activities, planned capital
expenditures and anticipated rates of production.
    The forward-looking statements are based on certain key expectations and
assumptions made by Pegasus, including expectations and assumptions concerning
prevailing commodity prices and exchange rates, availability and cost of
labour and services, the timing of receipt of regulatory approvals, the
performance of existing wells, the success obtained in drilling new wells, the
performance of new wells and the sufficiency of budgeted capital expenditures
in carrying out the Company's planned activities.
    Although Pegasus believes that the expectations and assumptions on which
the forward-looking statements are based are reasonable, undue reliance should
not be placed on the forward-looking statements because Pegasus can give no
assurance that they will prove to be correct. Since forward-looking statements
address future events and conditions, by their very nature they involve
inherent risks and uncertainties. Actual results could differ materially from
those currently anticipated due to a number of factors and risks. These
include, but are not limited to, the risks associated with the oil and gas
industry in general (e.g., operational risks in development, exploration and
production; delays or changes in plans with respect to exploration or
development projects or capital expenditures; the uncertainty of reserve
estimates; the uncertainty of estimates and projections relating to
production, costs and expenses, and health, safety and environmental risks),
commodity price and exchange rate fluctuations and uncertainties resulting
from potential delays or changes in plans with respect to exploration or
development projects or capital expenditures. These risks are set out in more
detail in the Company's Annual Information Form which has been filed on SEDAR
and can be accessed at www.sedar.com.
    The forward-looking statements contained in this press release are made
as of the date hereof and Pegasus undertakes no obligation to update publicly
or revise any forward-looking statements or information, whether as a result
of new information, future events or otherwise, unless so required by
applicable securities laws.

    Note: Boe means barrel of oil equivalent on the basis of 1 boe to 6,000
cubic feet of natural gas. Boe's may be misleading, particularly if used in
isolation. A boe conversion ratio of 1 boe for 6,000 cubic feet of natural gas
is based on an energy equivalency conversion method primarily applicable at
the burner tip and does not represent a value equivalence at the wellhead.

    The TSX Venture Exchange does not accept responsibility for the adequacy
or accuracy of this release.

    %SEDAR: 00005637E




For further information:

For further information: Patrick Mills, President and Chief Executive
Officer, (403) 521-6307; Darcy Anderson, Chief Financial Officer, (403)
521-6302; Kevin Angus, Executive Vice President, (403) 521-6306

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Pegasus Oil & Gas Inc.

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