Calvalley Petroleum - 2010 Third Quarter Results

Calvalley Petroleum Inc., (TSX: CVI.A)

CALGARY, Nov. 5 /CNW/ - Calvalley Petroleum Inc. (the "Company" or "Calvalley"), an international junior oil and gas company based in Calgary, Alberta, announces its financial and operating results for the third quarter ended September 30, 2010.

HIGHLIGHTS

Financial

These key financial indicators are discussed in more detail in the following sections.

(in thousands of US dollars except per share amounts)		Three months ended September 30				Nine months ended September 30
		2010			2009	2010	2009
Revenue (Gross)		19,877			12,591	41,825	36,703
Revenue from crude oil sales (net of royalties)		12,328			7,766	25,813	22,612
EBITDA^(1)		7,876			5,055	16,242	10,559
Operating income (loss)^(1)		4,641			3,032	9,495	3,142
Net income (loss)		2,744			2,122	5,954	842
	Per share	$0.03			$0.02	$0.06	$0.01
Capital expenditures		4,734			1,781	10,775	6,991
Funds flow from operations^(1)		6,744			4,453	13,939	8,948
	Per share	$0.07			$0.04	$0.14	$0.09
Cash flow (deficiency) from operating activities		1,150			3,587	9,729	5,951

⁽¹⁾ See "Non-GAAP Measures"

Calvalley's revenue, royalties, depletion and operating expenses were all impacted by the timing of lifts during the second quarter which resulted in the build-up of inventory and reduced each of these components of income due to lower revenue and the inclusion of the related costs in inventory at quarter end.  This trend was reversed in the third quarter when in addition to the oil produced during the quarter, a portion of the crude oil in inventory at June 30, 2010 was sold.

• Calvalley's revenue from crude oil sales was $19.9 million (gross) and $12.3 million (net of royalties) for the quarter ended September 30, 2010 (2009 - $12.6 million (gross) and $7.8 million (net of royalties)).  The significant increase in revenue is primarily attributable to a 40.5% increase in sales volume which is due to the timing of lifts and is not directly correlated with production for the quarter, which was 207,574 bbls in 2010 versus 192,448 bbls in 2009.
• Net income was $2.7 million ($0.03 per share) for the three months ended September 30, 2010, as compared to $2.1 ($0.02 per share) for the same period of 2009.  Net income for the six month period was $6.0 million versus $0.8 million during the corresponding period of 2009.
• Funds flow from operations was $6.7 million ($0.07/share) for the three months ended September 30, 2010, as compared to $4.5 million ($0.04/share) for the same period of 2009. 
• Operating costs, including transportation and facilities usage fees during the third quarter of 2010 were $3.5 million ($13.35/bbl) as compared to $2.1 million ($11.52/bbl) for the three months ended September 30, 2009.
• Calvalley continues to be well financed and capitalized with no outstanding debt and working capital of $73.3 million.

Operating

The following table sets forth key operating information:

Production (barrels of oil per day)	Three months ended September 30					Nine months ended September 30
	2010				2009	2010	2009
Total Block 9 production	4,512				4,184	4,572	4,292
Calvalley working interest (50.0%)	2,256				2,092	2,286	2,146

• Average daily production from Block 9 for the three months ended September 30, 2010 was 4,512 gross barrels per day (Calvalley working interest 2,256 bopd), a marginal decrease from the previous quarter's average of 4,606 bopd (2,303 bopd working interest share) and an increase from 2009 third quarter average production of 4,184 bopd (2,092 bopd working interest share). 
• The Ras Nowmah-2 well was drilled and tested during the third quarter.  Using the largest capacity pump available to the Company at the time of the test, the well flowed at a stabilized rate of approximately 3,000bbl/d of sweet crude (approximately 30˚ API) with no formation water and only 9.5% pressure drawdown.  Independent reservoir engineers have calculated a flow rate in excess of 5,000 bbl/d with 20% pressure drawdown.  The Company has commenced preparation for an appraisal well in the discovery area (Ras Nowmah-3).
• Due to the success of the Ras Nowmah-2 well, Calvalley is currently acquiring approximately 350 km of new 2D seismic data to delineate the new field discovery at the Ras Nowmah oil field for future development and to facilitate the exploration of the Qishn and Saar-Naifa in the Southern parts of Umm El Radhuma Plateau.
• Appraisal of the Qarn Qaymah structure was started by mobilizing the rig to the Qarn Qaymah-3 ("QQ-3") well site in mid-September. The drilling of the well commenced on October 2, 2010. QQ-3 is targeted to have a total depth of 4,460 meters including an openhole section of approximately 1,000 meters in the oil bearing Fractured Granitic Basement ("FGB"). The openhole section is expected to encounter seven (7) major fracture zones in the FGB.  The drilling of QQ-3 is progressing well and on budget with the current depth of approximately 2,000 meters. We expect to complete the drilling by mid-December.  The testing of the well will commence immediately thereafter.
• The Hiswah-34 development well was drilled and completed successfully during the third quarter and has been brought onto production.  The Company is also continuing its pressure maintenance and production optimization program for the Hiswah field.
• The Company is continuing to develop the Al Roidhat field  and is currently drilling the Al-Roidhat 9 development well.
• Due to the developments at Ras Nowmah, the execution of marketing agreements, and the continuing development of the Al Roidhat field, the Company is conducting preliminary technical work associated with an inter-field pipeline connecting the Al Roidhat and Ras Nowmah fields to the CPF which is located at the Hiswah field.  Construction is expected to begin in the first half of 2011 with completion scheduled for the third quarter of 2011.

Truck Offloading Facility (TOF)

• Construction of the TOF is underway and on schedule to be completed by year-end. The civil work is largely complete and all key equipment is either being transported to the site or nearing completion. Upon completion of the TOF, we expect to ramp up production to 10,000 bbl/d (5,000 net CVI working Interest).

Ethiopia

• Based on the surface geological work, Calvalley has selected a key prospective region for acquisition of an aeromagnetic survey.  The contractor for the acquisition of the aeromagnetic survey has been selected and the services have been mobilized to the region. Data acquisition is expected to commence in November 2010.

OPERATIONS REPORT

Production Overview

Average daily production from Block 9 for the three months ended September 30, 2010 was 4,512 gross barrels per day (Calvalley working interest 2,256 bopd), an marginal decrease from the previous quarter's average of 4,606 bopd (2,303 bopd working interest share) and an increase from 2009 third quarter average production of 4,184 bopd (2,092 bopd working interest share).  All production came from the partially developed Hiswah oil field, which produces high-quality sweet crude oil that is sold at a price comparable to Dated Brent Crude.

Gross field production at Hiswah continues to fluctuate between 4,200 to 5,200 (2,100 to 2,600 net) bopd. While producing wells are performing as expected, production continues to be constrained due to the limitation of the volume that is accepted by the Safer Facilities at Block 18 ("Safer").  Production from the Hiswah field is restricted to an average of twenty horizontal wells due to this limitation.  In addition, production at the Hiswah field has been choked back to minimize solution gas flaring. Upon full implementation of the field pressure maintenance program through water and gas injection, we expect to see a meaningful increase in well productivity as indicated by the simulation study. Our first water injection well has been performing better than expected. We have accelerated our full field water injection program and expect to have the second injection well operational prior to the year's end.

Truck Offloading Facility

As the Company nears completion of the Truck Offloading Facilities ("TOF") at Block 51, we are in position to realize the benefits of our development and appraisal drilling program at Block 9 in Yemen and to unlock the production and reserves potential of the asset. We expect that the completion of the TOF (presently scheduled for year-end 2010) will allow us to achieve significant production ramp up entering 2011.

Having established a market for all of the crude oil commercially available within Block 9, the TOF will enable Calvalley to market a blend of 26 API or better crude from Block 9 to the Masila Export Pipeline via Block 51 with pricing at an attractive price equivalent to the Masila Blend price.  We have made a significant progress toward the completion of TOF.  Civil work at the TOF is essentially complete. Fabrication of all key equipment including tanks, pumps, and metering systems is largely complete and the majority of the equipment is either in transit or has already arrived in Yemen. The mechanical and electrical work for the TOF is expected to commence prior to November 15, 2010. The facility is on schedule and on budget. The first delivery of blended crude from Block 9 to Block 51 is expected to commence immediately after the TOF is completed.  Initially, Calvalley will be trucking oil from Block 9 to the TOF with a maximum limit of 10,000bbl/d (5,000bbl/d Calvalley working interest). In the long run, the trucking will be replaced by a main pipeline connecting Block 9 to the export line. Upon completion of the export line, the 10,000 limit will be eliminated. The initial planning for the construction of a pipeline to deliver blended oil from the Company's Central Processing Facility ("CPF") at Block 9 to the Masila system has commenced.

In summary, Calvalley has now positioned itself to increase its production of blended crude to 10,000 bopd (5,000 bopd net) upon commissioning of the TOF.  The Company continues to drill development wells at its Hiswah and Al Roidhat fields to increase its production capacity.

Drilling, Completion, and Testing

Development wells at Hiswah

Calvalley successfully completed the drilling of the Hiswah 34 producer and the well has been placed on production.  Drilling operations on the Hiswah 35 producer are scheduled to commence during the fourth quarter of 2010.   The Company is also continuing its pressure maintenance and production optimization program for the Hiswah field.

Qarn Qaymah

Appraisal of the Qarn Qaymah structure was started by mobilizing the rig to the Qarn Qaymah-3 ("QQ-3") well site in mid-September. The drilling of the well commenced on October 2, 2010. QQ-3 is targeted to have a total depth of 4,460 meters including an openhole section of approximately 1,000 meters in the oil bearing Fractured Granitic Basement ("FGB"). The openhole section is expected to encounter seven (7) major fracture zones in the FGB.  Calvalley expects to keep this rig in the Qarn Qaymah area due to its capability to drill additional deep exploration/appraisal wells.

The drilling of QQ-3 is progressing well and on budget with the current depth of approximately 2,000 meters. We expect to complete the drilling by mid-December.  The testing of the well will commence immediately thereafter.

Ras Nowmah

The Company commenced the testing of the Ras Nowmah-2 discovery well on September 13, 2010.  A number of tests were conducted with two different size pumps. The final test data were obtained utilizing a larger capacity downhole pump ("ESP") which was installed by the Company for this latest phase of testing operations. The well flowed at a stabilized rate of approximately 3,000 bbl/d of sweet crude (approximately 30 degree API) and no formation water with only 9.5% pressure drawdown to the maximum operational capability of the ESP. Based on the pressure drawdown and build-up data, this 2nd phase of testing clearly indicates that the Ras Nowmah-2 well is potentially capable of producing at much higher flow rates. The test data were analyzed by an independent reservoir engineering firm in Calgary. The independent reservoir engineers calculated a flow rate in excess of 5,000bbl/d at a 20% pressure drawdown.

Given the success of the Ras Nowmah discovery, we have commenced the acquisition of 350 km of 2D seismic data which is expected to be completed by mid-December 2010. The seismic data will enable to Calvalley to further define Ras Nowmah field boundaries and high-grade the nearby prospects which are part of the 2011 drilling campaign.

Calvalley has commenced preparation for an appraisal well in the discovery area (Ras Nowmah-3).  The site preparation is 90% complete. We expect to start the drilling of Ran Nowmah-3 immediately following the completion of the seismic data acquisition program.

Ethiopia

Surface geological work at the Metema and Gimbi Blocks in Ethiopia has been completed and fully evaluated. Based on the surface geological work, Calvalley has selected a key prospective region covering an area of approximately 26,000 square km for the acquisition of an aeromagnetic survey. The contractor for the acquisition of the aeromagnetic survey has been selected and the services have been mobilized to the region. The data acquisition is expected to commence in November.

Filing of Reports on SEDAR

Calvalley's Management's Discussion and Analysis and Unaudited Financial Statements for the quarter ended September 30, 2010 can be found for viewing by electronic means on The System for Electronic Document Analysis and Retrieval at www.sedar.com. They can also be found on the Company's website at www.calvalleypetroleum.com.

Calvalley is listed on the Toronto Stock Exchange, trading under the symbol "CVI.A".

THE TORONTO STOCK EXCHANGE HAS NOT REVIEWED AND DOES NOT ACCEPT RESPONSIBILITY FOR THE ADEQUACY OR ACCURACY OF THIS RELEASE.

This press release may contain forward-looking statements including, without limitation, financial and business prospects and financial outlooks, and such statements may be forward-looking statements which reflect management's expectations regarding future plans and intentions, growth, results of operations, performance and business prospects and opportunities. Words such as "may", "will", "should", "could", "anticipate", "believe", "expect", "intend", "plan", "potential", "continue", and similar expressions have been used to identify these forward-looking statements. These statements reflect management's current beliefs and are based on information currently available to management. Forward-looking statements involve significant risk and uncertainties. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements including, but not limited to, changes in general economic and market conditions and other risk factors. Although the forward-looking statements contained herein are based upon what management believes to be reasonable assumptions, management cannot assure that actual results will be consistent with these forward-looking statements. Investors should not place undue reliance on forward-looking statements. These forward-looking statements are made as of the date hereof.

Forward-looking statements and other information contained herein concerning the oil and gas industry and Calvalley's general expectations concerning this industry are based on estimates prepared by management using data from publicly available industry sources as well as from reserve reports, market research and industry analysis and on assumptions based on data and knowledge of this industry which Calvalley believes to be reasonable. However, this data is inherently imprecise, although generally indicative of relative market positions, market shares and performance characteristics. While Calvalley is not aware of any misstatements regarding any industry data presented herein, the industry involves risks and uncertainties and is subject to change based on various factors.

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