ProspEx Announces Strong Results and Year End 2010 Reserve Estimates and Provides Operational Update

CALGARY, Jan. 18 /CNW/ - ProspEx Resources Ltd. ("ProspEx" or the "Company") is pleased to announce key results of its independent reserve evaluation for the year ended December 31, 2010 and to provide an operational update.

"ProspEx's strategy of utilizing horizontal drilling with multi-stage fracture stimulations to build a repeatable inventory of drilling opportunities in conventional reservoirs is generating very strong results." said John Rossall, President and Chief Executive Officer.  "Proved plus probable reserves growth of 52% over the prior year end, and the associated production growth attest to the success of this strategy."

2010 HIGHLIGHTS

  • Total Company Interest (as defined below) proved plus probable ("P+P") reserves, as independently evaluated by GLJ Petroleum Consultants Ltd. ("GLJ"), have grown to 18.6 million barrels of oil equivalent ("boe") of oil, NGLs and natural gas at December 31, 2010, an increase of 6.4 million boe or 52% compared to the prior year. Reserves per fully diluted share increased by 42% on a proved basis and 44% on a P+P basis;
  • December 2010 production averaged an estimated 4,480 boe per day, in excess of the Company's exit rate guidance of 4,000 boe per day;
  • Based on estimated 2010 annual average production of approximately 3,057 boe per day, the Company estimates that it replaced 454% of 2010 production on a proved basis, and 672% of 2010 production on a P+P basis;
  • The Company continues to have substantial financial flexibility with estimated net debt at December 31, 2010 of approximately $19 million (unaudited), compared to $21.6 million at the prior year end, and an approved credit facility limit of $40 million; and
  • ProspEx's net asset value per share at December 31, 2010 is estimated at $3.52 per basic common share outstanding, using P+P reserve values from GLJ's evaluation (as detailed below).

PRESIDENT'S MESSAGE

ProspEx brought its first horizontal well at Kakwa in the Deep Basin on stream in early November of 2009. Immediately prior to bringing this well on stream, ProspEx's production was approximately 2,500 boe per day. December, 2010 production is estimated at 4,480 boe per day, an increase of almost 80% in just over a year. Kakwa is now a well delineated project, with seven successful horizontal wells drilled to date. Reserves have been recognized across virtually all of ProspEx's land on the Kakwa trend by GLJ, ProspEx's independent reserves engineers, as detailed below. Following the success at Kakwa, ProspEx expanded its drilling to other opportunities with similar geology. At Pembina, the Company has now drilled two successful 100% working interest horizontal wells, confirming the potential on its lands in the area.

The Company's reserves growth reflects the success of these drilling programs.  According to GLJ, Total Company Interest P+P reserves at December 31, 2010, have grown to 18.6 million boe of oil, NGLs and natural gas, an increase of 52% compared to the prior year end.

This growth in reserves and production was accomplished while maintaining a strong balance sheet (unaudited net debt at December 31, 2010 is estimated to be approximately $19 million, about $3 million less than the prior year end), with only a modest $5.5 million flow through equity financing in October, 2010.

ProspEx remains committed to its focus on liquids rich natural gas projects, such as Kakwa and Pembina, where anticipated payout periods of approximately one year at current gas prices have allowed the Company to recycle cash relatively quickly back into its capital program. ProspEx's Kakwa and Pembina Falher assets provide an inventory of 30 (18 net) identified undrilled locations in proven plays with economics that are very competitive, even at today's lower gas prices.

In summary, despite a challenging natural gas price environment, ProspEx continued to successfully execute its stated strategy in 2010, further de-risking and delineating its core Kakwa project.  Drilling success at Pembina has added additional depth to the Company's prospect inventory.

OPERATIONAL UPDATE

Three (2.2 net) new horizontal wells were brought on to production in the fourth quarter: two (1.2 net) wells at Kakwa in the Deep Basin, and the Company's first horizontal (100% working interest) well at Pembina in West Central Alberta. At Kakwa, the well at 13-8-64-4W6 has demonstrated initial production performance superior to all wells previously drilled by the Company. This well was brought on stream in late October, and averaged 10.7 million cubic feet ("mmcf") per day (equivalent to 1,100 boe per day net to ProspEx's working interest) of liquids rich production over the first thirty days of production. Also at Kakwa, the well at 13-16-64-4W6 came on stream in mid-December and averaged 4.5 mmcf per day (equivalent to 460 boe per day net to ProspEx's working interest) over the first thirty days of production. Further information with respect to the Company's horizontal well production at Kakwa can be found on ProspEx's website at www.psx.ca. In addition to the above, a non-operated horizontal well drilled at Kakwa in the third quarter (30% working interest) was completed in the fourth quarter of 2010, and is expected to come on stream in late January.

At Pembina, ProspEx's first horizontal well was brought on to production in early December, and is currently producing at a restricted rate of 5.3 mmcf per day of gas (equivalent to 1,040 boe per day net to ProspEx's 100% working interest).

ProspEx's winter drilling program is currently underway. Two horizontal wells have been drilled to date: one at Kakwa (35% working interest) and one at Pembina (100% working interest). Both of these wells are currently awaiting completion.

Fourth quarter 2010 production is estimated to have been approximately 3,463 boe per day, for an annual average of approximately 3,057 boe per day in 2010. Current production is approximately 4,200 boe per day, reflecting the expected initial declines from the new wells brought onstream in December. ProspEx has an inventory of three (1.65 net) wells drilled but not yet producing: two (0.65 net) at Kakwa, and one (1.0 net) at Pembina.

OIL AND GAS RESERVES DATA

An independent evaluation of ProspEx's corporate reserves at December 31, 2010 was conducted by GLJ (the "GLJ Report") and prepared in accordance with the reporting guidelines of NI 51-101 utilizing estimated December 2010 production and certain unaudited financial information. The complete annual disclosure required under NI 51-101 in connection with the Company's oil and gas activities in 2010, using finalized production information for December 2010 and audited financial information, is expected to be contained in the Company's Annual Information Form for 2010 that is to be filed on or before March 31, 2011.

Under NI 51-101, the estimate most likely to be accurate for reserves is the proved plus probable or P+P category.  In this category ProspEx's Total Company Interest reserves were estimated to be 89.4 billion cubic feet ("bcf") of natural gas and 3,695 thousand barrels ("mbbls") of oil and NGLs for a total of 18,594 thousand boe at December 31, 2010. On a proved basis, the Total Company Interest reserves were estimated to be 57.5 bcf of natural gas and 2,319 mbbls of oil and NGL for a total of 11,897 thousand boe at December 31, 2010.

The GLJ Report reflects very strong reserves performance in 2010. The Total Company Interest P+P reserves at December 31, 2010 of 18.6 million boe increased by 6.4 million boe or 52% compared to the prior year.  Reserves per fully diluted share increased by 42% on a proved basis and 44% on a P+P basis (using fourth quarter weighted average shares outstanding of 60.6 million in 2010 (unaudited), and 57.4 million shares in 2009). 

This reserves growth was achieved in a difficult business environment with a limited capital program. The Company's preliminary unaudited estimate of 2010 capital spending is approximately $20 million, including acquisitions and dispositions. In addition, future development capital associated with P+P reserves increased by $37.8 million ($31.7 million on a proved basis).

Based on estimated 2010 annual average production of approximately 3,057 boe per day, the Company estimates that it replaced 454% of 2010 production on a proved basis, and 672% of 2010 production on a P+P basis.

The Company's P+P reserve life index at December 31, 2010 was estimated to be 14.7 years and the proved reserve life index was 9.4 years (both calculated using estimated fourth quarter 2010 production of 3,463 boe per day on an annualized basis).

The Company's 2010 reserves performance was primarily driven by drilling at Kakwa in the Deep Basin, and at Pembina in West Central Alberta.

At Kakwa, ProspEx has drilled seven horizontal wells and five vertical wells to date. The results of these wells, coupled with 3D seismic interpretation and geologic mapping, have allowed GLJ to recognize remaining Total Company Interest P+P reserves at Kakwa of 11.4 million boe net to ProspEx in the GLJ Report. This includes undeveloped reserves assigned to 20 (10.1 net) undrilled locations. A recovery factor of 60% was assigned in the southern portion of trend, while the northern portion was assigned a 50% recovery factor in the calculation of P+P reserves. The initial gross (100% working interest) raw P+P gas reserves assigned to all horizontal wells at Kakwa averaged 4.5 bcf.

At Pembina, ProspEx has now drilled two horizontal wells, one of which is on production, with the other well awaiting completion. The results of these wells and offsetting vertical and horizontal wells drilled by competitors, have allowed GLJ to recognize remaining Total Company Interest P+P reserves at Pembina of 4.4 million boe net to ProspEx in the GLJ Report. This includes undeveloped reserves assigned to 4 (4 net) undrilled locations. A recovery factor of 50% was assigned in the calculation of P+P reserves.  The initial gross (100% working interest) raw P+P gas reserves assigned to all horizontal wells at Pembina averaged 3.5 bcf.

The GLJ Report demonstrates an underlying net asset value substantially in excess of ProspEx's current share price. ProspEx's net asset value at December 31, 2010 is estimated to be $3.52 per basic share. The net asset value calculations use GLJ's estimates of the Total Company Interest of P+P reserves from the GLJ Report; GLJ's December 31, 2010 forecast of commodity prices; a discount rate of 10% and a notional value of $150 per acre (total $14 million) for undeveloped land at December 31, 2010, and estimated year end net debt of $19 million.  The net asset value per basic share was calculated by dividing the net asset value by 60.5 million shares.

Reserve Balance

                 
  Oil
(mbbls)
NGLs
(mbbls)
Gas
(mmcf)
Equivalent
(mboe)
  Total
Company
Interest
Net Total
Company
Interest
Net Total
Company
Interest
Net Total
Company
Interest
Net
Proved Producing 8 7 928 634 23,903 20,273 4,919 4,020
Proved Developed Non-Producing 87 65 107 80 552 474 286 224
Proved Undeveloped 0 0 1,189 947 33,020 30,121 6,692 5,968
Total Proved 95 72 2,224 1,661 57,474 50,868 11,897 10,211
Proved Plus Probable 124 92 3,571 2,644 89,394 78,456 18,594 15,813
  1. Columns may not add due to rounding
  2. Total Company Interest reserves means ProspEx's working interest (operated and non-operated) share before deduction of royalties and including any royalty interest of the Company
  3. Net reserves means ProspEx's working interest (operated and non-operated) share after deduction of royalties, plus any royalty interest of the Company

Present Value of Cash Flows

ProspEx's reserves were evaluated in the GLJ Report using GLJ's December 31, 2010 commodity price forecast.  Cash flows are prior to income taxes and general and administrative expenses.  Undeveloped land values are not included.  Well abandonment costs have been included for wells that have reserves assigned.

     
  Discount Rate  
($000s) 0% 5% 10% 15% 20%
Proved Producing 115,742 92,151 77,602 67,732 60,567
Proved Developed Non-Producing 8,136 5,855 4,421 3,462 2,788
Proved Undeveloped 146,395 92,989 64,648 47,424 35,930
Total Proved(1) 270,273 190,996 146,670 118,618 99,285
Total Proved plus Probable 480,056 301,824 218,183 170,171 138,983
  1. Columns may not add due to rounding

Net Asset Value per Share

The following table provides a calculation of ProspEx's estimated net asset value at December 31, 2010 based on the estimated future net revenues associated with ProspEx's P+P reserves before income tax and including a notional value of $150 per acre for undeveloped land.

       
  Discount Rate  
($000s) before tax 0% 5% 10% 15% 20%
Total P+P reserves value 480,056 301,824 218,183 170,171 138,983
Plus undeveloped land value 14,000 14,000 14,000 14,000 14,000
Less net debt (unaudited) (19,000) (19,000) (19,000) (19,000) (19,000)
Net asset value 475,056 296,824 213,183 165,171 133,983
Shares outstanding at Dec. 31, 2010 (000's) 60,533 60,533 60,533 60,533 60,533
Net asset value per outstanding share       $ 7.85       $ 4.90       $ 3.52       $ 2.73 $  2.21

Price Forecast

The GLJ price forecast used in the GLJ Report is summarized below:

       
Year WTI @ Cushing Edmonton light crude oil Natural gas at AECO-C
spot
  (US$/bbl) (C$/bbl) (C$/MMbtu)
       
2011 88.00 86.22 4.16
2012 89.00 89.29 4.74
2013 90.00 90.92 5.31
2014 92.00 92.96 5.77
2015 95.17 96.19 6.22
2016 97.55 98.62 6.53
2017 100.26 101.39 6.76
2018 102.74 103.92 6.90
2019 105.45 106.68 7.06
2020 107.56 108.84 7.21
2021+ +2.0%/yr +2.0/yr +2.0%/yr

Reader's Advisory

ProspEx is a Calgary based junior oil and gas company focused on exploration for natural gas in the Western Canadian Sedimentary Basin.

Certain information contained in this press release constitutes forward-looking information or statements including, without limitation, information and statements respecting: anticipated capital programs and expenditures, anticipated cash flow and payout periods, production forecasts, production additions and deletions, reserves and resources additions and deletions, additions to and deletions from the Company's historical and future capital programs, acquisitions or dispositions, operating expenses, G&A, royalties, expected timing of the drilling and tie-in of wells and the expected timing of the availability and filing of certain information, the receipt of regulatory approvals and the completion of facilities projects. 

Statements relating to "reserves" and "resources" are forward-looking information as they involve the implied assessment, based on certain estimates and assumptions that, among others, the reserves and resources described exist in the quantities predicted or estimated.

Forward-looking information and statements are often, but not always, identified by the use of words such as "anticipate", "seek", "believe", "expect", "hope", "plan", "intend", "forecast", "target", "project", "guidance", "may", "might", "will", "should", "could", "estimate", "predict" or similar words or expressions suggesting future outcomes or language suggesting an outlook.  By their very nature, forward-looking information and statements involve inherent risks and uncertainties, both general and specific, and risks that predictions, forecasts, projections and other forward-looking information and statements will not be achieved.  We caution readers not to place undue reliance on these statements as a number of important factors could cause the actual results to vary materially from the forward-looking information or statements.  These factors include, but are not limited to: the volatility of oil and gas prices; production and development costs; capital expenditures; the imprecision of reserve and resource estimates and estimates of recoverable quantities of oil, natural gas and liquids; the Company's ability to replace and expand oil and gas reserves; environmental claims and liabilities; incorrect assessments of value when making acquisitions or dispositions; increases in debt service charges; the loss of key personnel; the marketability of production; defaults by third party operators; unforeseen title defects; fluctuations in foreign currency and exchange rates; inadequate insurance coverage; compliance with environmental laws and regulations; changes in tax and royalty laws; the Company's ability to access external sources of debt and equity capital; and the Company's ability to obtain equipment in a timely manner to carry out development activities.  Further information regarding these factors may be found under the headings "Description of the Business - Risk Factors Relating to Our Business" and "Industry Conditions" in the Company's most recent Annual Information Form, under the heading "Operational and Other Business Risks" in the Company's Management's Discussion and Analysis for the year ended December 31, 2009, and in the Company's most recent consolidated financial statements, management information circular, quarterly reports, material change reports and news releases available under the Company's profile on SEDAR (www.sedar.com).  Readers are cautioned that the foregoing list of factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to the Company, investors and others should also carefully consider information set forth in the section "Forward-Looking Information" of the Company's most recent Annual Information Form respecting the assumptions upon which the Company bases certain forward-looking information and the uncertainties inherent in such assumptions.

The Company does not assume responsibility for the accuracy and completeness of the forward-looking information or statements and such information and statements should not be taken as guarantees of future outcomes.  Subject to applicable securities laws, the Company does not undertake any obligation to revise these forward-looking information or statements to reflect subsequent events or circumstances.  Furthermore, the forward-looking information contained in this press release are made as of the date of this document and the Company does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.  The forward-looking information and statements contained in this press release are expressly qualified by this cautionary statement.

For the purposes of this press release, boe has been calculated on the basis of six thousand cubic feet of gas to one barrel of oil.  The term boe may be misleading, particularly if used in isolation.  A boe conversion ratio of six thousand cubic feet to one barrel is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

The estimates of reserves and future net revenue for individual properties may not reflect the same confidence level as estimates of reserves and future net revenue for all properties, due to the effects of aggregation. Reserves replacement calculations are calculated by subtracting the reserves balance at December 31, 2009 from the reserves balance at December 31, 2010; adding the estimated production for 2010; and dividing the result by the estimated 2010 production.

SOURCE ProspEx Resources Ltd.

For further information:

John Rossall, President and CEO or George Yee, Vice President, Finance and Chief Financial Officer at ir@psx.ca or (403) 269-3940.


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ProspEx Resources Ltd.

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