Underground Energy Corporation announces Q2 2012 financial results

SANTA BARBARA, CA, Aug. 28, 2012 /CNW/ - Underground Energy Corporation ("Underground", "UGE" or the "Company") (TSX VENTURE: UGE; OTCQX: UGGYF) today announced its financial results for the three and six months ended June 30, 2012.  All amounts are in US dollars unless otherwise noted and these results have been prepared in accordance with International Financial Reporting Standards ("IFRS").

Financial Results

• Investment in oil and natural gas interests of $9,606,003 for the six months ended June 30, 2012;
• Investment in exploration and evaluation assets of $1,587,397 for the six months ended June 30, 2012;
• Loss for the three months ended June 30, 2012 $4,907,251, $0.02 per share (three months ended June 30 2011 - $1,168,560, $0.01 per share);
• Loss for the six months ended June 30, 2012 $7,457,953, $0.04 per share (six months ended June 30, 2011 - $1,882,810, $0.02 per share); and
• Working capital at June 30, 2012 - $1,182,198 (December 31, 2011 - $13,255,349).

Recent Highlights

During Q2, our drilling and completion results at Zaca were encouraging, but demonstrated the need for additional completion work and capital:

• Encouraging because we recovered oil from our new subthrust discovery in the Chamberlin East Fault Block of the Zaca Field Extension Project property (For pictures of oil on the tubing and rods, when they were pulled out of the hot oil reservoir in the new subthrust discovery in the Chamberlin East Fault Block, see page 4 of Management's Discussion and Analysis for the three and six months ended June 30, 2012.);
  
  
• Encouraging because our drilling logs and subsequent interpretation thereof indicated large zones of oil saturated Monterey in our new subthrust discovery;
  
  
• Encouraging because the pump test demonstrated that the reservoir is abnormally hot, with a high bottom hole temperature which we expect will mobilize the low gravity oil;
  
  
• Encouraging because the reservoir is highly permeable and has open porosity fractures - i.e. there are pathways for the hot oil to flow in the pre-fractured Monterey shale;
  
  
• Encouraging due to the amount of potential pay in the upper Monterey formation identified while drilling the Chamberlin 2-2 well to its target depth of 4,650 feet, in June, 2012; and
  
  
• Inconclusive in that we could not flow the Chamberlin 3-2 well fluids at rates high enough to demonstrate commerciality, due to the logistics of moving large quantities of water absent a water disposal well.  (We believe we have a path to solution for water disposal at Zaca, subject to the availability of additional capital.)

Highlights subsequent to quarter-end include:

• Our Independent Resource Auditor - Netherland, Sewell and Associates, Inc. - reported that their "best" estimate of total petroleum initially-in-place on our land holding at the Zaca Field Extension Project property is 493 million barrels, which includes resources in the hot reservoir in the new subthrust play in the Chamberlin East Fault Block, of which 12 million barrels is the best estimate of the Company's working interest contingent oil resources and 37 million is the best estimate of the Company's working interest prospective oil resources.  Readers should review the cautionary notes set forth in the press release of the Company dated August 22, 2012 under the heading "Netherland Sewell Resource Evaluation" in respect of the estimates of total petroleum initially-in-place, contingent resources and prospective resources set forth in this press release;
  
  
• Modifying the facilities at Burrel to correct operational issues.  Since Gabriel 1-35 went back on production on July 26, 2012, it has been pumping at an average rate of approximately 70 barrels of oil per day ("bopd"), about triple the previous rate, providing positive cash flow for the Company; and
  
  
• Testing the Chamberlin 2-2, resulting in production of 30 bopd during a 61-hour test period, from the bottom one-third of the productive zone.  Our testing indicated that some of the natural permeability of the Monterey shale was damaged by the drilling and completion process, and would likely benefit from stimulation in the future.  On August 24, 2012 we moved Chamberlin 2-2 into production.

"During the second quarter we focused on drilling and testing our wells at our Zaca Field Extension Project," said Michael Kobler, President and CEO of Underground. "We made substantial progress, discovering the Chamberlin East Fault Block, confirming the potential for step out wells from the existing Zaca Field, and identifying the commercial potential of the Zaca Field Extension Project. The progress we made this quarter clearly highlights the value of these additions to our portfolio.  This effort has diminished our financial resources to the point, however, that we've recently suspended production testing on our Chamberlin 3-2 well pending the receipt of additional funds through new capital and/or proceeds of sale of other assets.  We know that the Chamberlin 3-2 well has great pressure, permeability and natural fracture conductivity and we continue to believe that is has the potential to achieve optimized production rates in line with the average of over 200 bopd seen in wells drilled by other industry participants at the existing Zaca field."

Financial Review

Selected Financial Highlights			As at	As at
			June 30, 2012	December 31, 2011
Cash and cash equivalents			3,781,091	14,646,951
Oil and natural gas interests			14,421,969	4,778,378
Exploration and evaluation assets			2,353,850	5,377,653
Total assets			23,454,102	27,519,369
			3 months ended	3 months ended
			June 30, 2011	June 30, 2011
Net loss			(4,907,251)	(1,168,560)
Net loss per share - basic & diluted			(0.02)	(0.04)

As a development stage company, we constantly consume cash for our operating activities and for our investing activities.  During Q2, shareholders provided financial support by exercising 725,806 warrants, resulting in the receipt of $157,328. Subsequent to quarter-end, the Company's working capital has deteriorated further to an estimated deficiency $720,000 as of the date of this announcement.  The Company has commitments for initial loan financing of $500,000 from officers and directors of the Company subject to agreement on final terms and has entered into an agreement for the potential sale of one of the Company's exploration and evaluation properties and has received a non-refundable $100,000 deposit.  However, no definitive agreement for either the potential working capital loans or the potential sale has been reached as of the date of this announcement.  Accordingly, as required under applicable rules of IFRS, a going concern note has been included in the required form in Note 1 to the Company's unaudited condensed interim consolidated financial statements.

Oil & natural gas interests increased by approximately $9,640,000 since year-end and $7,190,000 during Q2, due primarily to $6,700,000 Zaca geotechnical evaluations, drilling & completions; $340,000 Zaca acquisition costs & lease rentals; and $160,000 other costs.

Exploration and Evaluation ("E&E") assets decreased by approximately $3,025,000 since year-end and decreased $3,665,000 during Q2.  The decrease in E&E assets during the quarter was due primarily to geological, geophysical investigations and seismic surveys of $300,000 at Devil's Den and other prospects; $260,000 of lease acquisitions and lease payments at AMI 1 and other prospects.  The additions were offset by $570,000 of impairment of the Challenger natural gas prospects and $2,910,000 at all other prospects and $745,000 for the reclassification of the property under sale negotiations to exploration property held for sale, all of which is discussed in the "Results of Operations" section below.  As a result of the focus on production testing at the Company's oil and natural gas interests for which there are proven and probable reserves, the Company determined that the carrying value of its exploration and evaluation assets was not fully recoverable as of June 30, 2012 as is more fully discussed in note 6 to the Company's unaudited condensed interim consolidated financial statements. Accordingly, the Company has recorded an impairment charge of $2.9 million during the three months ended June 30, 2012 to reduce the carrying amount of its exploration and evaluation assets to their estimated recoverable amount.

Net Loss increased by $3,740,000 compared to the same quarter last year, and is discussed in the "Results of Operations" section below.

Results of operations

		Three Months		Nine Months
		Ended June 30		Ended June 30
		2012	2011	2012	2011
Oil Revenues		136,390	-	299,928	-
Other Income		-	-	-	47,925
Revenues		136,390	-	299,928	47,925
Production and operating expense		507,238	-	918,831	-
Exploration and evaluation expense		3,668,679	204,834	4,238,778	484,738
Administrative expense		862,480	966,935	2,585,662	1,437,884
Other expense		2,222	-	2,222	-
Net finance expense		3,150	(3,209)	3,899	8,113
Share of loss (gain) of equity
accounted investments		(128)	-	8,489	-
Net loss		4,907,251	1,168,560	7,457,953	1,882,810

 

Net Loss increased by $3,740,000 compared to the same quarter last year due to the impairment of E&E assets and due to the start-up of production operations.

• Exploration and Evaluation ("E&E") Expense increased by $3,450,000 compared to the same quarter last year primarily due to the Company's determination that due to higher than expected expenditures at the Zaca Field Extension Project, it lacked the capital necessary to pursue its various remaining exploration and evaluation projects in the foreseeable future and thus, recorded an impairment provision of approximately $2.9 million to reduce the carrying value of Exploration and Evaluation Assets to management's assessment of the fair value less costs to sell the Company's E&E assets (see Exploration and Evaluation Assets above) and the $570,000 impairment of the Challenger natural gas prospects acquired as part of a "package deal" when we bought all the California prospects from another oil company.
  
  
• Production and Operating Expense increased by $510,000 compared to the same quarter last year primarily due to $410,000 lease operating expenses, which we expect to come into line with oil revenues as we increase production and rationalize operations on the producing properties acquired in Q4 of 2011 - Burrel and the Zaca Field Extension Project; and $90,000 G&A expenditures by the recently formed production and operating department.
  
  
• Administrative Expense decreased by $100,000 compared to the same quarter last year primarily due to $420,000 warrant liability mark-to-market adjustment; which was partially offset by $100,000 increased personnel time allocated to administrative functions, $80,000 increased travel expense, and the $150,000 write-off of non-refundable deposits paid to acquire minority working interests in certain petroleum leases, such acquisitions now not proceeding.
  
  
• Oil Revenues increased by $140,000 compared to the same quarter last year due primarily to oil production from the Gabriel 1-35 oil well at Burrel Deep.
  
  

Outlook

Upon, and subject to, receipt of additional capital, we plan to:

• Permit and commission a water disposal well at Zaca, which we expect to reduce our water disposal costs from the current $9.75/barrel of water to $0.20/barrel of water.  This will allow us to flow the Chamberlin 3-2 well with an economic cost structure;
  
  
• Workover the Chamberlin 1-2, Chamberlin 2-2 and Chamberlin 3-2 wells at Zaca, with a view to optimizing production rates in line with those seen by other industry participants at the existing Zaca oil field; and
  
  
• Permit, drill and complete as many wells at Zaca as are technically and financially prudent.

To view the Company's Second Quarter 2012 Unaudited Condensed Interim Financial Statements, related Notes to Unaudited Condensed Interim Financial Statements, and Management's Discussion and Analysis, please see the Company's quarterly filings which will be available on www.sedar.com.

Further information is available on the Company's website www.ugenergy.com.

About Underground Energy Corporation

Underground is focused on developing its Zaca Field Extension Project in Santa Barbara County, California.  In total, Underground currently holds mineral rights on approximately 70,000 net acres of prospective lands in California and Nevada with an initial focus on the Monterey Shale in California. Underground is listed on the TSX Venture Exchange under the ticker symbol "UGE" and quoted on the OTCQX trading platform under the ticker symbol "UGGYF". For more information on Underground, including a copy of the Company's latest corporate presentation, please visit www.ugenergy.com. Underground's regulatory filings are available under the Company's profile at www.sedar.com.

Cautionary Statements

Statements in this press release contain forward-looking information and forward-looking statements within the meaning of applicable securities laws (collectively, "forward-looking information").  Forward-looking information is frequently characterized by words such as "plan", "expect", "project", "intend", "believe", "anticipate", "estimate" and other similar words, or statements that certain events or conditions "may" or "will" occur.  In particular, forward-looking information in this press release includes, without limitation, statements with respect to: (i) our expectation that high bottom hole temperature will mobilize the low gravity oil in the reservoir encountered in the Monterey formation; (ii) the amount of potential pay in the Monterey formation; (iii) that the Monterey shale will benefit from stimulation in the future; and (iv) the Company's plans for raising additional capital and its further plans for the use of such capital. 

Although we believe that the expectations and assumptions reflected in the forward-looking information are reasonable, there can be no assurance that such expectations or assumptions will prove to be correct. In particular, assumptions have been made that: (i) Underground will be able to obtain equipment, qualified staff and regulatory approvals in a timely manner to carry out its planned exploration and development activities; (ii) Underground will have sufficient financial resources with which to conduct its planned capital expenditures; and (iii) the current regulatory and tax regime will remain substantially unchanged. Certain or all of the forgoing assumptions may prove to be untrue.

Forward-looking information is based on the opinions and estimates of management at the date the statements are made, and is subject to a variety of risks and uncertainties and other factors (many of which are beyond the control of Underground) that could cause actual events or results to differ materially from those anticipated in the forward-looking information.  Some of the risks and other factors could cause results to differ materially from those expressed in the forward-looking information include, but are not limited to: operational risks in exploration, development and production; delays or changes in plans; competition for and/or inability to retain drilling rigs and other services; competition for, among other things, capital, acquisitions of reserves, undeveloped lands, skilled personnel and supplies; risks associated to the uncertainty of reserve and resource estimates; governmental regulation of the oil and gas industry, including environmental regulation; geological, technical, drilling and processing  problems and other difficulties in producing reserves; the uncertainty of estimates and projections of production, costs and expenses; unanticipated operating events or performance which can reduce production or cause production to be shut in or delayed; incorrect assessments of the value of acquisitions; the need to obtain required approvals from regulatory authorities; stock market volatility; volatility in market prices for oil and  natural gas; liabilities inherent in oil and natural gas operations; access to capital; and other factors.  Readers are cautioned that this list of risk factors should not be construed as exhaustive. 

The forward-looking information contained in this news release is expressly qualified by this cautionary statement.  Underground does not undertake any obligation to update or revise any forward-looking statements to conform such information to actual results or to changes in our expectations except as otherwise required by applicable securities legislation.  Readers are cautioned not to place undue reliance on forward-looking information.

Certain information contained herein is considered "analogous information" as defined in National Instrument 51-101 including the information concerning wells drilled by other industry participants at Zaca and the production rates therefrom.  Underground is unable to verify whether such information has been prepared in accordance with NI 51-101 and the Canadian Oil and Gas Evaluation Handbook and Underground is unable to confirm whether such estimates have been prepared by a qualified reserves evaluator. The information on the historic production of wells drilled by other industry participants on the Zaca Field was obtained from California Division of Oil, Gas and Geothermal Resources on August 24, 2011. The information has been provided to demonstrate the potential for similar production rates for certain wells drilled by or to be drilled by Underground at the Zaca Field.

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

UNDERGROUND ENERGY CORPORATION
Condensed Interim Consolidated Balance Sheets

(in US dollars) | (unaudited)
				June 30, 2012			December 31, 2011
Assets
	Cash and cash equivalents		$	3,781,091		$	14,646,951
	Restricted cash			476,654			1,077,260
	Accounts receivable			456,316			302,422
	Prepaid expenses and deposits			762,403			653,370
	Loans receivable			-			167,970
	Exploration property held for sale			743,491			-
	Total current assets			6,219,955			16,847,973
	Investments			111,757			155,374
	Property, plant and equipment			14,768,540			5,138,369
	Exploration and evaluation assets			2,353,850			5,377,653
	Total non-current assets			17,234,147			10,671,396
Total assets			$	23,454,102		$	27,519,369
Liabilities
	Accounts payable and accrued liabilities		$	4,749,757		$	3,144,624
	Warrant liability			288,000			448,000
	Total current liabilities			5,037,757			3,592,624
	Loans and borrowings			14,227			-
	Decommissioning obligations provision			171,925			99,012
Total liabilities				5,223,909			3,691,636
Equity
	Share capital			38,186,408			37,590,330
	Share-based payment reserve			2,588,621			1,324,286
	Deficit			(22,544,836)			(15,086,883)
Total equity				18,230,193			23,827,733
	Going concern
	Commitments
	Subsequent events
Total equity and liabilities			$	23,454,102		$	27,519,369

 

UNDERGROUND ENERGY CORPORATION
Condensed Interim Consolidated Statements of Comprehensive Loss

(in US dollars) | (unaudited)
				Three Months						Six Months
				Ended June 30						Ended June 30
				2012			2011			2012			2011
Revenues
Oil and natural gas revenue			$	136,390		$	-		$	299,928		$	-
Other income				-			-			-			47,925
				136,390			-			299,928			47,925
Expenses
Production and operating				507,238			-			918,831			-
Exploration and evaluation				3,668,679			204,834			4,238,778			484,738
Administrative				862,480			966,935			2,585,662			1,437,884
Other				2,222			-			2,222			-
				5,040,619			1,171,769			7,745,493			1,922,622
Operating Loss				4,904,229			1,171,769			7,445,565			1,874,697
Finance (income)				(4,162)			(3,209)			(10,866)			(3,988)
Finance expense				7,312			-			14,765			12,101
Net finance expense (income)				3,150			(3,209)			3,899			8,113
Loss before loss of equity accounted investments				4,907,379			1,168,560			7,449,464			1,882,810
Share of loss/(income) of equity accounted investments				(128)			-			8,489			-
Loss and comprehensive loss for the period			$	4,907,251		$	1,168,560		$	7,457,953		$	1,882,810
Loss per share:
	Basic and diluted		$	(0.02)		$	(0.01)		$	(0.04)		$	(0.02)

 

UNDERGROUND ENERGY CORPORATION
Condensed Interim Consolidated Statements of Changes in Equity

(in US dollars) | (unaudited)
				Number of ordinary shares			Share capital			Share- based payment reserve			Deficit			Total equity
Balance at December 31, 2010				56,334,336		$	5,028,198		$	433,625		$	(4,919,052)		$	542,771
Issue of ordinary shares				46,212,798			6,678,150			-			-			6,678,150
Share issuance costs, net of tax of $nil				-			(148,270)			-			-			(148,270)
Share-based payments				-			-			151,592			-			151,592
Non-cash dividends paid				-			-			-			(2,853)			(2,853)
Loss for the period				-			-			-			(1,882,810)			(1,882,810)
Balance at June 30, 2011				102,547,134		$	11,558,078		$	585,217		$	(6,804,715)		$	5,338,580

Number of shares has been adjusted to reflect the corporate merger, which is described in note 13
of the Audited Consolidated Financial Statements for the year ended December 31, 2011.

				Number of ordinary shares			Share capital			Share- based payment reserve			Deficit			Total equity
Balance at December 31, 2011				202,152,379		$	37,590,330		$	1,324,286		$	(15,086,883)		$	23,827,733
Warrants exercised				2,749,906			596,078			-			-			596,078
Share-based payments				-			-			1,264,335			-			1,264,335
Loss for the period				-			-			-			(7,457,953)			(7,457,953)
Balance at June 30, 2012				204,902,285		$	38,186,408		$	2,588,621		$	(22,544,836)		$	18,230,193

 

UNDERGROUND ENERGY CORPORATION
Condensed Interim Consolidated Statements of Cash Flows

(in US dollars) | (unaudited)
				Three Months						Six Months
				Ended June 30						Ended June 30
				2012			2011			2012			2011
Cash flows from operating activities:
Loss for the period			$	(4,907,251)		$	(1,168,560)		$	(7,457,953)		$	(1,882,810)
Adjustments for:
	Share of loss (income) of equity accounted investments			(128)			-			8,489			-
	Depletion, depreciation and amortization			63,813			23,393			104,367			29,012
	Impairment losses on exploration and evaluation assets			3,482,361			41,405			3,867,709			41,405
	Loss on divestiture of PP&E assets			2,222			-			2,222			-
	Gain on sale of exploration and evaluation assets			-			-			-			(47,925)
	Accretion of decommissioning obligations			366			-			562			-
	Share-based compensation			514,729			56,499			1,264,335			151,592
	Warrant liability, mark-to-market adjustment			(416,000)			-			(160,000)			-
Change in non-cash working capital, operating activities				(715,099)			150,697			(1,699,641)			(291,922)
Net cash used in operating activities				(1,974,987)			(896,566)			(4,069,910)			(2,000,648)
Cash flows from investing activities:
Additions to property, plant and equipment				(7,161,663)			(123,893)			(9,664,409)			(131,677)
Additions to exploration and evaluation assets				(560,691)			(965,168)			(1,587,397)			(1,485,261)
Proceeds from sale of exploration and evaluation assets				-			-			-			50,000
Investment in Careaga Sand and Asphalt Company				-			-			-			(2,853)
Return of capital from Subset Energy, LLC				35,128			-			35,128			-
Reduction in restricted cash				323,625			-			600,606			-
Change in non-cash working capital, investing activities				1,739,304			-			3,209,817			-
Net cash used in investing activities				(5,624,297)			(1,089,061)			(7,406,255)			(1,569,791)
Cash flows from financing activities:
Proceeds from issue of share capital				-			-			-			6,678,150
Proceeds from loans and borrowings				14,227			-			14,227			-
Share issuance costs				-			(138,294)			-			(148,270)
Proceeds upon exercise of warrants				157,328			-			596,078			-
Net cash from financing activities				171,555			(138,294)			610,305			6,529,880
Change in cash and cash equivalents				(7,427,729)			(2,123,921)			(10,865,860)			2,959,441
Cash and cash equivalents beginning of period				11,208,820			5,511,092			14,646,951			427,730
Cash and cash equivalents end of period			$	3,781,091		$	3,387,171		$	3,781,091		$	3,387,171

 

 

SOURCE: Underground Energy Corporation

Peter Ballachey
Chief Financial Officer
Underground Energy Corporation
Tel: [phone] x 17     

Simon Clarke
Vice President, Corporate Development
Underground Energy Corporation
Tel: [phone]