Overview:
First quarter production increased to an average 690 boe per day in 2009 primarily due to the drilling success at Marten Mountain in the Mitsue area of Alberta during the last quarter of 2008.
The 7-12-75-6W5 well was completed as a flowing oil well in December 2008 and placed on production January 2, 2009. The well produced at an average rate of 540 (356 net) barrels of oil per day through to the end of February 2009. A production optimization procedure conducted near the end of February 2009 resulted in a rate increase to 900 (600 net) barrels of oil per day through to the end of March 2009.
The well was shut in at the end of March 2009, at which time the new oil well production period expired and the well had produced its allowable through to the end of September 2008. It will come back on production in October 2009 or upon approval of good production practice (GPP). The 14- 1 well is currently restricted to a daily allowable production rate of 148 barrels of oil. The produced oil has negligible water cut.
The company has applied for Waterflood project status and GPP approval, which will allow higher production rates from the currently restricted 14-1 horizontal well and the new 7-12 well. Approval of the project is expected during the second quarter of 2009. Construction of the pipeline and battery facilities currently under design will begin once Waterflood project status is given and higher production rates have been approved.
Completion of the construction projects and increased production rates are expected in the third quarter of 2009.
Results of Operations
Funds from operations for the quarter are CAD1.1 million or CAD0.02 per share and were the result of production increasing to 690 boe per day, reduced operating costs per boe and impacted by significantly lower commodity prices than in the prior year.
As planned, the company spent only CAD0.5 million on capital expenditures while planning and doing minor field work on the waterflood project at Marten Mountain.
Outlook
During Q1 2009 Exall Energy continued the program to fully develop and exploit the Marten Mountain discovery. The proven reserves and production capability established by the wells are expected to increase the corporate cash flow and borrowing power sufficiently to fund further development of that key property, as well as other assets owned by the company.
The completion and testing of the water injection well has allowed the company to quickly advance the application for enhanced recovery. Exall Energy is currently focused on the waterflood project and the design and permitting of the pipeline and battery facilities in the area.
The company expects to have final approvals for the project and to proceed with construction in the second quarter of 2009. Completion of the project is scheduled for the summer of 2009 to coincide with higher production rates upon the waterflood project approval.
Exall Energy has also begun preparation of a second surface location for the drilling of up to five wells along the extension of the Marten Mountain channel trend beginning in the fourth quarter of 2009.
The company plans to drill the wells as horizontal development wells from a single pad. The wells drilled to date have had extended lateral offsets (up to 2,400 meters) to the reservoir due to restricted surface access in Lesser Slave Lake Provincial Park. Subsequent wells will have substantially shorter offsets (less than 1,200 meters) to the reservoir as drilling has established that the channel trend is exiting the provincial park.
The resulting savings in drilling cost will be substantial, with the well cost dropping from the historical average of CAD4 million to an estimated CAD2 million. In addition, the downward pressure on costs due to inactivity in the service sector along with the recently announced Alberta government drilling incentive and 5% maximum Crown Royalty incentive programs will have a positive effect on the company’s proposed capital expenditures.
Most of the company’s production is located in Alberta which will allow Exall Energy to recover CAD200 per meter drilled or CAD600,000 for a 3,000 meter well through a credit of 50% on Crown Royalties paid.
The horizontal well drilled in Jayar, Alberta during the first quarter of 2008 and production optimization in the pool has resulted in production increasing to 120 boe per day net to Exall Energy from less than 100 boe per day a year ago. The operator of the Jayar property has finished conducting a review of the property and has released information regarding its intent to drill up to ten infill locations targeting poorly drained areas of the pool.
Exall Energy will be participating (8.7% WI) in the drilling of another horizontal infill well at Jayar, scheduled for the fourth quarter of 2009. Exall Energy has an average 14.5% working interest in future wells.
The first quarter of 2009 has continued an exciting and dynamic year for Exall Energy and the industry in general. Starting from a modest production base of light oil and gas, the company has shown itself capable of setting and achieving ambitious targets, beginning with the drilling of an outstanding well in the first quarter of 2008, and finally in the fourth quarter, duplicating the drilling success and setting the company on track for explosive production growth in the future as shown by the production results in the first quarter of 2009.
