Tuesday, December 13, 2011

Petrobakken - Operational Update, 2012 Guidance

Interesting to note that Petrobank is giving up half of its dividend and enrolling in the DRIP.  I would not have thought that Petrobank could afford to give up $53 million in cash flow.  What does that suggest about:

- performance of Kerrobert wells
- potential for a joint venture at May River

We are very pleased to announce the appointment of W. Brett Wilson to the Board or Directors of PetroBakken. We are confident Mr. Wilson's 25 plus years of investment banking experience, primarily as co-founder of FirstEnergy Capital Corp., will be a valuable addition to our ongoing strategic direction and governance team at PetroBakken.

Operational Update

Production in early December has reached over 48,000 barrels of oil equivalent per day ("boepd") (87% light oil and NGLs), a 23% increase over third quarter 2011 production levels, based on field estimates. Our Bakken business unit production is over 23,000 boepd and our Cardium business unit production now exceeds 14,750 boepd (with over 1,450 boepd currently shut-in awaiting tie-in to gas conservation systems), with the remainder of the production generated by our Saskatchewan conventional and AB/BC business units. We continue to forecast a 2011 exit production rate of over 49,000 boepd.

Initial 2012 Capital Plan

We are also pleased to announce our initial capital plan for 2012, which allow us to build on our 2011 operational success. We anticipate capital development expenditures of approximately $700 million, primarily focused on horizontal drilling and completions, predominantly in the Bakken and Cardium light oil plays. We expect that this drilling-focused activity will generate a 2012 exit production rate of between 50,000 and 54,000 boepd. Our estimated year-over-year average production growth will exceed 15%, on an absolute and per-share basis. We expect this initial 2012 program to be executed entirely from funds from operations, with surplus cash flow available to fund dividends and debt repayment.

For 2012 we estimate that our corporate base decline rate will be in the range of 30-35%. In 2010, our base production declined approximately 40%, while the 2011 base decline rate is now forecast at approximately 35%. We have been encouraged by the results of our recently completed wells, and we are also beginning to see the benefit of the continued maturation of our producing assets with a significant proportion of our production now coming from older, shallower decline, horizontal wells.

Capital plans for 2012 will focus primarily on our light oil resource plays in southeast Saskatchewan for the Bakken and central Alberta for the Cardium, as well as our Mississippian conventional light oil play in southeast Saskatchewan. The majority of our 2012 capital spending is expected to be used to drill, complete and equip ("DC&E") over 183 net wells (due to bilateral wells this represents over 240 net horizontal well bores) for approximately $545 million. The plan also includes investments of approximately $155 million in facilities, land, seismic, recompletions and direct administration capital.

In southeast Saskatchewan, we expect to drill 96 net Bakken wells (including approximately 58 net bilateral wells) and 35 net conventional wells. Overall, we plan on spending $290 million of DC&E capital in southeast Saskatchewan, comprised of $225 million in the Bakken (including EOR spending) and $65 million in our conventional Mississippian plays. We will also continue to invest in our EOR pilots to evaluate several injection configurations, primarily using natural gas. Currently, we have five pilot projects underway that are in various stages of implementation. It is expected that we will have our second pilot on injection in Q1 2012, with three others being added by the end of Q3 2012.

In Alberta and British Columbia we plan to drill 49 net wells for DC&E capital of $225 million in our Cardium business unit and three wells in our AB/BC business unit for $30 million. The majority of our Cardium drilling will be focused on West Pembina. In our AB/BC business unit, activity will further delineate and evaluate our new oil resource plays building on our 2011 drilling program where we have drilled three wells and are currently drilling one additional well. At this time, we estimate we have identified over 100 drilling locations in the new oil resource play areas.

As part of our ongoing balance sheet management, and to reward continuing support from existing shareholders, we are pleased to announce the implementation of a DRIP. The DRIP provides eligible holders of common shares resident in Canada the opportunity to reinvest their monthly cash dividends in PetroBakken shares at a 5% discount to the then current market prices. Petrobank (59% shareholder of the Company) has indicated an intention to participate in the DRIP with respect to 50% of their PetroBakken shares, which will amount to $53 million in additional liquidity to the Company on an annual basis. Subject to the receipt of approval of the Toronto Stock Exchange, the DRIP will be implemented for the January 2012 dividend, which is payable in mid-February 2012. Additional information regarding the DRIP can be found below.

We are expanding our hedging program to hedge up to 20,000 bopd of our net production in the first half of 2012 in order to provide further cash flow security. This is an increase to our past practices in which we hedged approximately 25% of our production. To-date, we have 12,750 bopd hedged for the first half of 2012 at an average floor of $80.49 and a ceiling of $113.92. For the second half of 2012 we have 8,500 bopd hedged at an average floor of $76.62 and a ceiling of $119.77. This increased hedging program has been adopted to allow us to lock in strong oil prices as we move into 2012.

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