Cequence Energy Ltd. announces third quarter results

CALGARY, Nov. 12 /CNW/ - Cequence Energy Ltd. ("Cequence" or the "Company") (TSX: "CQE") is pleased to announce its operating and financial results for the third quarter ended September 30, 2009. The unaudited financial statements and management's discussion and analysis are available on Cequence's website at www.cequence-energy.com and on SEDAR at www.sedar.com.

Highlights

The quarter was highlighted by a series of transactions that have repositioned the Company to execute an aggressive strategy to accumulate and exploit long life crude oil and natural gas properties.

    
    -   Completed a corporate reorganization on July 29, 2009 which included
        the appointment of a new management team, realignment of the Board of
        Directors and infusion of $65 million of new equity.
    -   Eliminated the outstanding current debt and emerged from the quarter
        with a positive working capital balance of $23.9 million and
        $45 million of available credit.
    -   Completed two property acquisitions increasing production by
        approximately 850 boepd for a total cost of $15.8 million.
    -   Announced an offer to acquire the remaining shares of our subsidiary
        HFG Holdings Inc. ("HFG") to increase our working interest in our
        Sinclair Montney play.
    -   Absorbed $5.1 million of reorganization costs and one-time
        adjustments in the quarter and expect reductions in operating
        expenses, royalty expenses, general and administrative expenses and
        interest starting in the fourth quarter of 2009.
    -   Natural gas production shut-in at Gunnell and Gordondale in the third
        quarter is back on-stream.
    -   Current production has been increased to 2,200 boepd with
        6,000 gj/day (1,050 boepd) of natural gas hedged at $7.85 through
        March 2010.
    -   Achieved third quarter funds flow of $2.6 million before one-time
        charges and reorganization expenses.
    -   Subsequent to quarter-end, signed a purchase and sale agreement to
        acquire 165 boepd of natural gas production in the Valhalla area of
        Alberta.


    Operating and Financial Highlights

                                   Three months ended     Nine months ended
                                      September 30,         September 30,
    -------------------------------------------------------------------------
                                     2009       2008       2009       2008
    -------------------------------------------------------------------------

    Financial ($)
    Production revenue               $5,962    $11,503    $19,136    $38,874
    -------------------------------------------------------------------------
    Net income (loss)                (6,994)     6,113     (5,998)    (7,192)
    -------------------------------------------------------------------------
    Funds flow from operations(1)    (2,663)     4,638        749     18,710
    -------------------------------------------------------------------------
    Funds flow before one-time
     charges and reorganization
     expense(2)                       2,387        n/a      5,799        n/a
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Production volumes
    Natural gas (mcf/d)               6,734     10,918      7,556     13,030
    -------------------------------------------------------------------------
    Crude oil (bbls/d)                  128        197        124        218
    -------------------------------------------------------------------------
    Natural gas liquids (bbls/d)         67        107         88        113
    -------------------------------------------------------------------------
    Total (boe/d)                     1,317      2,123      1,471      2,503
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Sales prices
    Natural gas, including
     realized hedges ($/mcf)          $7.69      $8.33      $7.70      $8.23
    -------------------------------------------------------------------------
    Crude oil ($/bbl)                 66.85     112.39      61.00     105.36
    -------------------------------------------------------------------------
    Natural gas liquids ($/bbl)       66.76     112.16      49.42     103.00
    -------------------------------------------------------------------------
    Total ($/boe)                    $49.20     $58.88     $47.64     $56.68
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Operating Netbacks ($/boe)
    Price                            $49.20     $58.88     $47.64     $56.68
    -------------------------------------------------------------------------
    Royalties                         (9.66)     (7.36)     (5.86)     (7.08)
    -------------------------------------------------------------------------
    Transportation                    (2.55)     (1.63)     (1.98)     (1.45)
    -------------------------------------------------------------------------
    Operating costs                  (21.54)    (20.45)    (17.69)    (14.49)
    -------------------------------------------------------------------------
    Operating netback                $15.46     $29.44     $22.11     $33.66
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Capital Expenditures              3,333      9,208      8,276     31,334
    -------------------------------------------------------------------------
    Acquisitions                     16,083          -     16,083          -
    -------------------------------------------------------------------------
    Total capital expenditures       19,416      9,208     24,359     31,334

    -------------------------------------------------------------------------
    Net working capital
     (deficiency)(3)                 23,888    (44,858)    23,888    (44,858)
    -------------------------------------------------------------------------
    Long term debt                   18,120          -     18,120          -
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Weighted average shares
     outstanding:
    -------------------------------------------------------------------------
    Basic                            26,577      9,779     15,333      9,771
    -------------------------------------------------------------------------
    Diluted                          26,577      9,779     15,333      9,771
    -------------------------------------------------------------------------

    Undeveloped land (net acres)    155,400    119,700    155,400    119,700
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Notes:
    (1) Funds flow from operations is calculated as net income plus non
        controlling interest, unrealized derivative gains and losses,
        depletion, accretion, future income taxes, stock compensation
        expense, valuation allowances and asset retirement expenditures.
    (2) Funds flow before one-time charges and reorganization expense is
        calculated as funds flow plus the reorganization expenses of
        $3.3 million and $1.8 in onetime adjustments to royalties and
        operating expenses. This measure is only applicable to 2009.
    (3) Net working capital is calculated cash, net working capital less
        derivative contract asset and demand credit facilities.
    

Following the reorganization, management has focused on creating a more competitive cost structure for the Company. In the two months following the reorganization, significant progress has been made to reduce general and administrative expenses and identify areas to lower operating costs. It is expected that initial positive results from these efforts will be evident as early as the fourth quarter of 2009. For the third quarter of 2009 Cequence reported a loss of $7.0 million. The quarter was negatively affected by certain onetime charges and expenses as follows: $3.3 million in reorganization expenses, $1.8 million in adjustments to gross overriding royalties and operating expenses and an impairment charge on long term investments of $0.5 million. These one-time charges have resulted in operating netbacks being $14.50 per boe lower than what would have otherwise been realized.

The Company has a strong balance sheet with consolidated positive net working capital of $23.8 million at the end of the quarter, excluding the fair value of the commodity contract. Cequence has long term debt of $18.1 million as the Company's lender has provided liquidity for the long term investments.

Subsequent to quarter end, Cequence raised $2.0 million through the issuance of 500,000 flow through shares. Proceeds of the share issuance will be used to fund a portion of the fourth quarter capital program. The flow-through shares require Cequence to incur $2.0 million of Canadian Development Expense prior to the end of 2009.

Acquisitions and Exploration and Development Activities

In the third quarter, Cequence completed two property acquisitions that have significantly enhanced our asset portfolio at extremely attractive valuations. Collectively, the acquisitions increased production by approximately 850 boepd for a total cost of $15.8 million. In November, a third property acquisition was agreed to in the Valhalla area of northwestern Alberta. The acquisition totals $6.1 million and adds 165 boepd of natural gas production. Management intends to continue pursuing similar acquisitions and expects to find comparable opportunities at attractive valuation in the near future.

On October 6, 2009, Cequence announced the proposed acquisition of the remaining shares of our 71 percent owned subsidiary, HFG. The acquisition will simplify the corporate structure of Cequence and increases the working interest in our Sinclair Montney prospects in northwestern Alberta to 100 percent. Cequence has initiated a drilling program that will satisfy the outstanding flow through commitment within HFG and address certain land expiry issues. The development program will also serve to evaluate our twelve sections of land at Sinclair, targeting the Lower Doig formation with additional potential in the Lower Montney, the Halfway, the Nikannasin and various shallower horizons. To date, we have successfully completed two Lower Montney zones and two Lower Doig zones from three vertical wells. All of these completions have been successful in retaining the mineral rights on these lands and have provided enough information to pursue a horizontal drilling program that will ultimately determine the true economic significance of the project. In late October, the Company began drilling its first horizontal well which is expected to be finished by mid November. A second horizontal well is planned to be spud before the end of November. By year end, both of these wells are expected to be completed and drilling will commence on a third horizontal well. Cequence's planned activity in the fourth quarter is strategic to its continued development success with the potential for significant reserve additions to the Company but the program is also designed to preserve expiring mineral rights.

Recompletion efforts on existing and purchased assets are also ongoing. Cequence has begun a series of recompletion operations in the general Peace River Arch area with up to six workovers scheduled to be completed by year end.

Outlook and Guidance

Cequence has emerged from its reorganization and subsequent acquisition activity in the third quarter with a solid production base, a healthy balance sheet and good access to capital. The Company is situated in the enviable position of owning 60 sections of 100 percent working interest land in the Lower Doig/Montney fairway with the financial flexibility to execute a meaningful winter drilling program.

Capital expenditures are budgeted to be $24 million in the fourth quarter, including our Valhalla property acquisition of $6.1 million. While much of this capital is being spent on land retention and the evaluation of our Sinclair Montney play, we currently anticipate an increase in average production to 2,100 boepd in the fourth quarter from 1,317 in the third quarter. Cash flow in the fourth quarter is forecast to be approximately $3.0 million using an average natural gas price of $4.35 AECO.

Budgeted capital expenditures in the first quarter of 2010 are forecast to be $30 million with average production increasing by approximately 25 percent to 2,800 boepd. Cash flow in the first quarter is expected to be $4.5 million, using a natural gas price of $5.00 AECO and including the revenue from our current hedge of 6,000 gj/day at a price of $7.85. Current debt and working capital at the end of March 2010 is forecast to be $19 million. Capital spending is expected to be within cash flow through the end of the second quarter.

Capital spending for the remainder of 2010 will be evaluated at the completion of the winter drilling program. Full year guidance will be established at that time.

    
    Guidance                                              Q4 2009    Q1 2010
    -------------------------------------------------------------------------
    Average production, boepd                               2,100      2,800
    -------------------------------------------------------------------------
    Capital expenditures ($)                               18,000     30,000
    -------------------------------------------------------------------------
    Acquisitions ($)                                        6,100          -
    -------------------------------------------------------------------------
    Cash flow ($)                                           3,000      4,500
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

On behalf of the Board of Directors,

Howard Crone

President and Chief Executive Officer

Forward-looking Statements or Information

Certain statements included or incorporated by reference in this press release constitute forward-looking statements or forward-looking information under applicable securities legislation. Such forward-looking statements or information are provided for the purpose of providing information about management's current expectations and plans relating to the future. Readers are cautioned that reliance on such information may not be appropriate for other purposes, such as making investment decisions. Forward-looking statements or information typically contain statements with words such as "anticipate", "believe", "expect", "plan", "intend", "estimate", "propose", "project" or similar words suggesting future outcomes or statements regarding an outlook. Forward-looking statements or information in this press release may include, but are not limited to, statements or information with respect to: business strategy and objectives; development, exploration, acquisition and disposition plans and the timing thereof; reserve quantities and the discounted present value of future net cash flows from such reserves; future production levels. Forward-looking statements or information are based on a number of factors and assumptions which have been used to develop such statements and information but which may prove to be incorrect. Although the Company believes that the expectations reflected in such forward-looking statements or information are reasonable, however, undue reliance should not be placed on forward-looking statements because the Company can give no assurance that such expectations will prove to be correct. In addition to other factors and assumptions which may be identified in this press release, assumptions have been made regarding, among other things: the impact of increasing competition; the timely receipt of any required regulatory approvals; the ability of the Company to obtain qualified staff, equipment and services in a timely and cost efficient manner; the ability of the operator of the projects which the Company has an interest in to operate the field in a safe, efficient and effective manor; the ability of the Company to obtain financing on acceptable terms; field production rates and decline rates; the ability to replace and expand oil and natural gas reserves through acquisition, development of exploration; the timing and costs of pipeline, storage and facility construction and expansion and the ability of the Company to secure adequate product transportation; future oil and natural gas prices; currency, exchange and interest rates; the regulatory framework regarding royalties, taxes and environmental matters; and the ability of the Company to successfully market its oil and natural gas products. Readers are cautioned that the foregoing list is not exhaustive of all factors and assumptions which have been used.

Forward-looking statements or information are based on current expectations, estimates and projections that involve a number of risks and uncertainties which could cause actual results to differ materially from those anticipated by the Company and described in the forward-looking statements or information. These risks and uncertainties which may cause actual results to differ materially from the forward-looking statements or information. The material risk factors affecting the Company and its business are contained in the Company's Annual Information Form which is available at SEDAR at www.sedar.com.

The forward-looking statements or information contained in this press release are made as of the date hereof and the Company 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 required by applicable securities laws. The forward-looking statements or information contained in this press release are expressly qualified by this cautionary statement.

Additional Advisories

The press release contains references to terms commonly used in the oil and gas industry. Netback is not defined by GAAP in Canada and is referred to as a non-GAAP measure. Netbacks equal total revenue less royalties, operating costs and transportation costs. Management utilizes this measure to analyze operating performance.

Funds flow from operations is a non-GAAP term that represents net income (loss) adjusted for non-cash items including depletion, depreciation, accretion, future income taxes, stock-based compensation, unrealized hedge gains (losses), asset write-downs and gains (losses) on sale of assets and non-controlling interest and before adjustments for changes in working capital. The Company evaluates its performance based on earnings and funds flow from operations. The Company considers funds flow from operations a key measure as it demonstrates the Company's ability to generate the cash flow necessary to fund future growth through capital investment and to repay debt. The Company's calculation of funds flow from operations may not be comparable to that reported by other companies. Funds flow from operations per share is calculated using the same weighted average number of shares outstanding used in the calculation of income (loss) per share.

Boes are presented on the basis of one Boe for six Mcf of natural gas. Disclosure provided herein in respect of Boes may be misleading, particularly if used in isolation. A Boe conversion ratio of 6 Mcf:1 Bbl 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 Company's financial statements and management's discussion and analysis for the three and nine month periods ended September 30, 2009 will be available on the SEDAR system by accessing Cequence's public filings under "Search for Public Company Documents" within the "Search Database" module at Sedar.com

%SEDAR: 00023788E

SOURCE Cequence Energy Ltd.

For further information: For further information: Howard Crone, Chief Executive Officer, (403) 806-4040, hcrone@cequence-energy.com; David Gillis, Chief Financial Officer, (403) 806-4041, dgillis@cequence-energy.com


Custom Packages

Browse our custom packages or build your own to meet your unique communications needs.

Start today.

CNW Membership

Fill out a CNW membership form or contact us at 1 (877) 269-7890

Learn about CNW services

Request more information about CNW products and services or call us at 1 (877) 269-7890