Operational Review:
Twin Butte Energy continued to restrict capital spending in the first quarter by limiting the capital program to CAD5.4 million and continued to focus on overall corporate cash cost decrease. A three gross well program including two exploratory wells resulting in three gas wells was concluded in the first quarter.
At Oak in northeast British Columbia, Twin Butte Energy drilled two gross successful gas wells, which was driven by a competitors offset drainage. One of these wells encountered a successful exploratory gas zone. As well, infrastructure was built enabling production startup late in the quarter. The company added 150 boe/d of deliverability through pool delineation which will lead to a number of downspaced drilling sites to pursue, as gas prices improve.
At Bulwark, in Eastern Alberta, an exploratory gas discovery was brought on stream during the first quarter of 2009. With recent Alberta royalty incentives the low net cost (net of CAD200 per meter credit) of such targets will lead the company to drill at least two additional wells in the region over the remainder of 2009.
Additional capital projects focused on conservation of solution gas and operating cost optimization through rental equipment returns. Considerable effort has been directed to the decrease of operating costs with the restructuring of Twin Butte Energy’s field operations. Although first quarter is normally the highest operating cost quarter because of weather issues, the company has seen positive results from its efforts with unit operating costs dropping below CAD12 /boe in the month of March 2009.
With a forward capital program designed to match cash flow for the second half of 2009, Twin Butte Energy’s program will entail the drilling of an additional 5.5 net wells. Target locations are at Teal, in British Columbia and Thunder, Highland and Provost in Alberta.
As well, a number of recompletions and workovers are planned in the Jayar and Thunder areas which will increase deliverability and reserve recovery. At the end of first quarter Twin Butte Energy had about CAD3.2 million of remaining flow through obligations for 2009, and it is comfortable that the company’s planned projects will fulfill this commitment.
Production averaged 2,936 boe/d, for the first quarter of 2009, up 17%, compared with the production of 2,500 boe/d recorded in the year-ago quarter and a modest decline from the fourth quarter of 2008 average of 3,039 boe/d.
The inherent low production decline nature of Twin Butte Energy’s assets will allow the company to maintain a relatively flat production profile with low capital spending throughout the remainder of 2009. Planned processing plant turnarounds in late second quarter and early third quarter will temper corporate rates by about 100 boe/d in each quarter.
Outlook:
The primary and fundamental driver for Twin Butte Energy in the short term is to make sure preservation of the company’s considerably undervalued asset base. At the same time the company will continue to generate and build upon its capital inventory to ensure that when economic conditions improve Twin Butte Energy will have an excess of opportunities to pursue its long term growth strategy.
Twin Butte Energy’s view is that summer natural gas prices may test new lows before starting to gain positive momentum through the fall and early winter. This foreseeable rally will be driven by sharp decreases in North American deliverability because of existing and forecast low number of wells drilled.
Twin Butte Energy has positioned itself to survive the summer lows, having hedged about 55% of Twin Butte Energy’s summer volumes at CAD4.55/mcf; having right sized G&A for foreseeable levels of spending; working hard to drive Twin Butte Energy’s operating costs lower; and successfully renewing the company’s credit facility at CAD65 million.
Net debt is anticipated to decline slightly by the end of the second quarter from the existing level of CAD51.4 million as Twin Butte Energy under spends second quarter cash flow, keeping the well within its bank lines, providing financial flexibility.
Capital spending in the second half of the year will match cash flows, ensuring no further raise in net debt, and possibly a decrease. Besides, Twin Butte Energy has nonstrategic assets now testing the disposition market which the company believes will lead to positive results and further reduce its net debt.
