Connacher Announces Year End Results

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Mar 16, 2012, 07:00 ET

CALGARY, March 16, 2012 /CNW/ - Connacher Oil and Gas Limited (CLL - TSX; "Connacher" or the "Company") today released its financial and operating results for 2011, which marked the first full year of operations at the Company's second steam-assisted gravity drainage ("SAGD") bitumen project at Great Divide. Record annual bitumen production and solid refinery margins helped drive record adjusted earnings before interest, taxes, depreciation and amortization ("adjusted EBITDA").

Connacher also sold a number of mature conventional and undeveloped oil and gas properties during the year which enhanced year-end cash balances, positioning the Company to meet all of its financial obligations in 2012. Furthermore, in a year where capital spending was somewhat constrained, the Company's reserves held steady while new technologies achieved favorable results which should lead to increasingly favorable operating performance in the years to come.

As previously announced, Connacher is engaged in a strategic review process. Therefore, no conference call will be held at this time.

Highlights for 2011 are as follows:

Total production averaged 14,493 boe/day, up 35 percent from 10,699 boe/day in 2010
Bitumen production averaged 13,379 bbl/day, up 61 percent from 8,299 bbl/day in 2010
Refinery margins were $42.0 million, up 44 percent from $29.0 million in 2010
Adjusted EBITDA was $129.9 million, up 41 percent from $92.2 million in 2010
Cash flow was $45.1 million, up 26 percent from $35.9 million in 2010
$117.3 million was raised from the sale of Battrum, Marten Creek, Halfway Creek, Latornell and minor undeveloped land
Cash on hand at December 31, 2011 was $117.0 million, up 500 percent from $19.5 million a year earlier
SAGD+^TM technology delivered breakthrough results and the next stage of testing will likely occur in Q2 2012
Long term debt was refinanced and maturities were extended to 2018 and 2019
Electrical reliability at Great Divide was improved and bitumen movement by rail to new markets was initiated

Financial Summary


FINANCIAL ($000 except per share amounts)		Q4 2011	Q4 2010	%	YTD 2011	YTD 2010	%
Revenue, net of royalties		$226,454	$177,245	28	$872,806	$589,931	48
Adjusted EBITDA ⁽²⁾		39,095	31,951	22	129,871	92,206	41
Net earnings (loss)		(59,477)	(25,616)	132	(114,105)	(44,669)	155
	Per share, basic and diluted	(0.13)	(0.06)	83	(0.25)	(0.10)	150
Capital expenditures		36,670	31,735	16	163,428	259,165	(37)
Cash on hand		117,045	19,532	499	117,045	19,532	499
Working capital		16,876	138,644	(87)	16,876	138,644	(87)
Long-term debt		856,068	847,387	1	856,068	847,387	1
Shareholders' equity		$421,076	$523,187	(20)	$421,076	$523,187	(20)

OPERATIONAL		Q4 2011	Q4 2010	%	YTD 2011	YTD 2010	%
Daily production volumes ⁽³⁾
	Bitumen (bbl/d)	13,173	13,238	-	13,379	8,299	61
	Crude oil (bbl/d)	417	873	(52)	427	883	(52)
	Natural gas (Mcf/d)	2,955	8,318	(64)	4,124	9,100	(55)
	Barrels of oil equivalent (boe/d) ⁽⁴⁾	14,083	15,498	(9)	14,493	10,699	35
Upstream pricing ⁽⁵⁾
	Bitumen ($/bbl)	$53.04	$45.08	18	$47.59	$45.65	4
	Crude oil ($/bbl)	$89.57	$66.72	34	$82.44	$65.63	26
	Natural gas ($/Mcf)	$3.27	$3.44	(5)	$3.70	$3.90	(5)
	Barrels of oil equivalent ($/boe) ⁽⁴⁾	$52.96	$44.09	20	$47.41	$44.13	7
Downstream
	Throughput - Crude charged (bbl/d)	10,295	10,137	2	9,890	9,693	2
	Refinery utilization (%)	108	107	1	104	102	2
	Margins (%)	7	9	(22)	10	9	11

⁽¹⁾	^{Effective October 1, 2010, the capitalized costs relating to the Company's second oil sands project, Algar, were subjected to depletion and the revenues, expenses and finance charges associated with the project were reported in the statement of operations. Prior thereto, Algar was considered a major development project under construction and all costs, including related financing costs and internal operating expenses net of revenue, were capitalized. Accordingly, the above table does not include production and sales volumes for Algar prior to October 1, 2010}
⁽²⁾	^{A non-GAAP measure which is defined in the Advisory section of the MD&A}
⁽³⁾	^{Represents bitumen, crude oil and natural gas produced in the period. Actual sales volumes may be different due to inventory or other changes during the period. Actual volumes sold were 14,164 boe/d in Q4 2011 and 14,390 boe/d in YTD 2011 (Q4 2010 -15,128 boe/d and YTD 2010 - 10,606 boe/d)}
⁽⁴⁾	^{All references to barrels of oil equivalent (boe) are calculated on the basis of 6 Mcf: 1 bbl. This conversion is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Boes may be misleading, particularly if used in isolation}
⁽⁵⁾	^{Before royalties and risk management contract gains or losses and after applicable diluent and transportation costs divided by actual sales volumes}

Since 2004, Connacher has established itself as a significant independent player in the Canadian oil sands industry with an enterprise value in excess of $1.3 billion and an underlying pre-tax and after-tax net asset value which is significantly higher.

Review of 2011

The first half of 2011 saw the continued ramp-up of Algar (which commenced production in August 2010) and a focus on increasing reliability at both Pod One and Algar. Dislocated pricing in the bitumen market due to pipeline outages and apportionment across North America resulted in Connacher pioneering the sale of dilbit by rail to the Gulf and West coasts. Operational reliability continued to improve during the year as evidenced by reduced chemical usage, improved water treating and recycling rates, upgraded electrical services, improved downhole pump run life and optimized evaporator maintenance. Work continued during the year on the Great Divide expansion project, for which Connacher expects to obtain regulatory approval in the next several months. The SAGD+™ trial (where solvent is mixed with steam and injected into the reservoir) started in July and demonstrated very encouraging results as a way to improve well productivity and reduce steam:oil ratios ("SORs").

In May 2011, the Company refinanced its long term debt at lower coupon rates, extended maturities to 2018 and 2019 and reduced its exposure to U.S. dollar denominated debt by replacing a portion of its debt with Canadian dollar denominated debt. Asset sales continued throughout the year and added to cash balances. Joint venture processes were initiated in the oil sands and light oil resource plays but were subsequently suspended.

The refinery in Great Falls, Montana had strong results in 2011 as prices for refined products in its market area remained healthy throughout the year.

Reserves

Connacher owns a 100 percent working interest in approximately 87,000 net acres of oil sands leases, primarily located at its Great Divide project in northeastern Alberta, situated 80 kilometers southwest of Fort McMurray. Numerous oil accumulations in the McMurray formation have been identified for continuing and future development on Connacher's properties.

As at December 31, 2011, Connacher's estimated proved and probable ("2P") bitumen and conventional crude oil and natural gas reserves, as evaluated by GLJ Petroleum Consultants Ltd. ("GLJ"), independent qualified reserves evaluators, totaled approximately 504 million barrels of oil equivalent ("boe"). Despite a very modest capital program during 2011, bitumen reserve volumes held virtually constant in all reserve categories, with the exception of proved producing bitumen, of which approximately 4.9 million barrels were produced during the year. The ten percent present value of 2P reserves decreased to $2.5 billion, due primarily to increased estimated future capital costs, adjusted near-term production forecasts and capital plans. Contingent and prospective bitumen resources also declined, mainly as a result of the sale of the Company's Halfway Creek property.

Connacher's first SAGD project at Great Divide, Pod One, has been producing bitumen since late 2007, with commercial production commencing March 1, 2008. Algar commenced producing bitumen in August 2010 and commerciality was achieved October 1, 2010. Production from both projects since start-up through December 31, 2011 has totaled approximately 12.6 million barrels of bitumen, of which 4.9 million barrels were produced in 2011. Such amounts have been deducted from earlier estimates of proved reserves prior to the calculation of reserves as at December 31, 2011. Connacher's conventional reserve base declined, due primarily to the sale of several mature conventional properties, totaling approximately 8.1 million boe.

Property Divestitures

In 2011, the Company embarked on a program to rationalize its non-core asset base. In February 2011, the mature Battrum, Saskatchewan crude oil producing property was sold for $56.2 million and in April 2011 the Marten Creek/Randall natural gas property in north central Alberta was sold for $22.1 million. Additionally, Connacher sold its undivided 50 percent working interest in lands at Halfway Creek, Alberta, situated south of Fort McMurray, for $26.5 million, as well as undeveloped land for $12.5 million, primarily situated at Latornell in the Deep Basin of northwestern Alberta. Total proceeds from these divestitures was $117.3 million which was added to working capital.

Downstream

Connacher's 9,500 bbl/d heavy oil refinery in Great Falls Montana had a very successful 2011, operating at 104 percent of capacity, up from 102 percent of capacity in 2010. Strong refinery margins were primarily due to the improved stability of refining operations, more favorable weather conditions for road paving activities that buoyed higher relative asphalt sales and increased demand for refined petroleum products in 2011.

The refinery is strategically aligned with the Company's oil sands business. It primarily processes Canadian heavy sour crude oil into a range of higher value refined petroleum products, thereby capturing more of the value chain in a produced barrel of oil. Accordingly, the refinery provides a physical hedge for Connacher's bitumen revenue by recovering a portion of the heavy oil differential in its netbacks under normal operating conditions. Over the past several years closely aligned marketing initiatives between upstream and downstream operations has served the Company well in dealing with the challenging North American energy market environment.

Operating and Financial Results for the Year 2011

Notwithstanding higher adjusted EBITDA, the Company incurred a net loss of $114.1 million or $0.25 per share in 2011 compared to a net loss of $44.7 million or $0.10 per share in 2010. This was primarily due to lower unrealized foreign exchange gains, mainly in respect of U.S. dollar denominated debt, and higher depletion and finance charges, partially offset by gains on the sale of assets and on risk management contracts. Please refer to the Management's Discussion and Analysis ("MD&A") for a more detailed discussion in this regard.

At December 31, 2011, cash balances were $117.0 million, working capital was $16.7 million and long term debt totaled $856.0 million. Convertible debentures with face value of approximately $100 million are due for repayment in June of 2012, accounting for the difference between cash and working capital as the debentures are classified as current debt on the balance sheet. Connacher has available bank credit lines of $100 million net of outstanding letters of credit totaling $2.2 million which had been issued by the Company at year end 2011.

Total capital expenditures during the year were $163.4 million which was financed from operating cash flow and cash balances. Details of the overall capital program are contained in the MD&A.

Fourth Quarter 2011

Production of bitumen in the fourth quarter of 2011 ("Q4 2011") averaged 13,173 bbl/d, effectively equal to the fourth quarter of 2010 ("Q4 2010") bitumen production of 13,238 bbl/d. Revenue in Q4 2011 was $226.5 million, an increase of 28 percent over Q4 2010. Contributing to the improved revenue was increased refinery throughput and an average bitumen price of $53.04 per barrel, up 18 percent from $45.08 per barrel in Q4 2010. Operating cash flow was markedly improved in Q4 2011 at $19.3 million, compared to $9.0 million in Q4 2010. Capital expenditures were $36.7 million in Q4 2011. Because of year-end adjustments for non-cash items, Connacher incurred a loss of $59.5 million or $0.13 per share for Q4 2011, compared with a loss of $25.6 million or $0.06 per share for Q4 2010.

Outlook

As previously announced, the Company's Board of Directors has initiated a process to review Connacher's business plan and to identify, examine and consider all strategies available to the Company, both near and long term, in order to prudently determine the optimal course of action for the Company. Goldman Sachs and RBC Capital Markets have been engaged to assist the Board of Directors in connection with this strategic review. The Company has a number of capital projects with very good economics that are expected to increase production and/or improve netbacks. These projects will continue to be evaluated during this period and will be undertaken when free cash flow is available.

Externally there is great uncertainty in the capital and debt markets which creates volatility in oil prices and oil price differentials. Connacher remains bullish regarding the long term price of bitumen, but the Company also recognizes that during the second quarter there will be continued pressure on differentials and therefore wellhead pricing. The price of natural gas is a key component in Connacher's oil sands operations (natural gas is the biggest cost component in the generation of steam) and is expected to remain low for the remainder of the year. Locally, the Alberta corridor continues to be a "bubble" with regard to costs of services, fabrication of equipment and access to talent. Importantly, the hiatus in Connacher's capital spending provided time to determine more cost effective if not local solutions. The ever-increasing focus on oil sands by the media, stakeholders and governments has resulted in expanded - not streamlined - approval processes. Effective leadership on both sides of the border will be necessary to drive efficient and economic outcomes.

Connacher is focused on delivering successive and sustained improvement in operating and financial results and liquidity. Based on currently available information and prevailing commodity prices, the Company anticipates 2012 results that reflect solid operational performance given capital constraints.

As a means of managing the risk of commodity price volatility, management monitors crude oil markets and enters into risk management commodity sales contracts from time to time to ensure Connacher has adequate downside commodity price protection, having regard to its established hedging policy, financial leverage and capital commitments.

2012 Capital Expenditure Budget and Production Guidance


2012 capital budget on a cash basis											($ in millions)
Upstream											$35
Downstream											11
Corporate											4
Total 2012 capital budget on cash basis											$50

The Company's 2012 capital budget has been set at $50.0 million as outlined above, including the previously announced maintenance capital budget of $37.0 million. The Company is proceeding with preparatory work on several sustaining and growth projects, including the recently completed five-well core hole program designed to provide further technical data for the Great Divide expansion project and Pad 104 drilling program (Pod One). Additional work is ongoing to finalize the design basis memorandum for the Great Divide expansion project, complete the preparation of a commercial front end engineering design study for the Company's SAGD+™ project and the expansion and upgrading of rail and other facilities at the Montana refinery.


2012 production guidance
Upstream Production (boe/d)														12,600 - 13,900
Downstream Crude Charged (bbl/d)														9,150 - 10,600

The 2012 production guidance provided includes provision for turnarounds at both Pod One and Algar in Q3 2012 and does not include incremental production which may be achieved from recommencement of the Company's SAGD+ project or completion of any future project. Actual production achieved during 2012 could differ materially from these estimates.

General

The current directors of the Company are pleased to welcome Mr. Greg Boland and Mr. Garry Mihaichuk to the Board. The Annual General Meeting of Shareholders of the Company is scheduled to be held in Calgary on June 28, 2012.

Connacher Oil and Gas Limited is a fully integrated Calgary-based exploration, development and production company active in the production and sale of bitumen, crude oil, natural gas and natural gas liquids. The Company's principal assets are holdings in the Great Divide oil sands project in northern Alberta, as well as conventional light gravity crude oil and natural gas properties in central Alberta and a wholly-owned subsidiary which operates a 9,500 bbl/d heavy crude oil refinery in Great Falls, Montana.

Forward Looking Information

This press release contains forward looking information including but not limited to development of additional oil sands reserves (including the expansion of bitumen productive capacity at Great Divide and the anticipated timing of required regulatory approvals associated therewith), commodity price protection afforded by the use of risk management contracts, Connacher's ability to meet all of its financial obligations in 2012, favorable operating results arising out of the use of new technologies, the impact of planned capital projects on production and netbacks and the timing of undertaking such projects, future financial and operating results and the anticipated timing of initiating the next stage of testing of the SAGD^+™ technology.

Forward looking information is based on management's expectations regarding future growth, results of operations, production, future commodity prices and foreign exchange rates, future capital and other expenditures (including the amount, nature and sources of funding thereof), plans for and results of drilling activity, environmental matters, business prospects and opportunities and future economic conditions. Forward looking information involves significant known and unknown risks and uncertainties, which could cause actual results to differ materially from those anticipated. These risks include, but are not limited to: the risks associated with the oil and gas industry (e.g., operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve and resource estimates, the uncertainty of geological interpretations, the uncertainty of estimates and projections relating to production, costs and expenses, and health, safety and environmental risks), the risk of commodity price and foreign exchange rate fluctuations, risks associated with the impact of general economic conditions, risks and uncertainties associated with securing and maintaining the necessary regulatory approvals and financing to proceed with the operation and continued expansion of the Great Divide oil sands project.

Information relating to "reserves" and "future net revenues" associated therewith are deemed to be forward-looking information, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described exist in the quantities predicted or estimated, and can be profitably produced in the future to achieve the future net revenue calculated in accordance with certain assumptions. The assumptions relating to the reserves and associated future net revenues reported herein are contained in the report of GLJ Petroleum Consultants Ltd. on the reserves, resources and future net revenue of the Corporation as at December 31, 2011 and are summarized in Connacher's Annual Information Form for the year ended December 31, 2011 (the "AIF"). Future net revenues associated with reserves do not necessarily represent fair market value.

In this press release, per barrel of oil equivalent (boe) amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of crude oil (6:1). The conversion is based on an energy equivalency conversion method primarily applicable to the burner tip and does not represent a value equivalency at the wellhead. Boes may be misleading, particularly if used in isolation. Additionally, given the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion ratio of 6:1 may be misleading as an indication of value.

In addition, reported average production levels may not be reflective of sustainable production rates and future production rates may differ materially from the production rates reflected in this press release due to, among other factors, difficulties or interruptions encountered during the production of bitumen.

Additional risks and uncertainties affecting Connacher and its business and affairs are described in further detail in Connacher's AIF, which is available at www.sedar.com. Although Connacher believes that the expectations in such forward looking information are reasonable, there can be no assurance that such expectations shall prove to be correct. The forward looking information included in this press release is expressly qualified in its entirety by this cautionary statement. The forward looking information included herein is made as of the date of this press release and Connacher assumes no obligation to update or revise any forward looking information to reflect new events or circumstances, except as required by law.

Colin M. Evans
Interim Co-Managing Director

Kelly J. Ogle
Interim Co-Managing Director

Peter D. Sametz
Interim Chief Executive Officer

Phone: 403 538-6201
[email protected]
connacheroil.com

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