Underground Energy Corporation Announces 2011 Financial Results

SANTA BARBARA, CA, April 25, 2012 /CNW/ - Underground Energy Corporation ("Underground", "UGE" or the "Company") (TSX VENTURE SYMBOL: UGE) today announced its financial results for the year ended December 31, 2011.  All amounts are in US dollars unless otherwise noted and these results have been prepared in accordance with International Financial Reporting Standards ("IFRS").

Recent Highlights

Highlights for the quarter ended December 31, 2011 include:

• Closing of a transaction which significantly increased the Company's California acreage to 38,005 net acres through the acquisition of 30,152 net acres, including two producing oil wells with total production of approximately 65 bopd, a producing gas well, a number of drill ready locations and multiple exploitation and exploration prospects in the Santa Maria and San Joaquin Basins.  Total consideration was US$5.5 million, comprising $4.6 million in cash and $0.9 million in assumed liabilities;
• Purchasing and reprocessing existing seismic data as well as acquiring more than 30 miles of new 2D swath seismic data over the recently acquired Zaca Field Extension area; and
• Acquiring and processing 10 miles of new 2D swath seismic data over the Asphaltea prospect.

Highlights subsequent to year-end include:

• Renewing permits for two drill pads and six well locations at the Zaca Extension Project;
• Entry into an agreement with Key Energy Services to secure a drilling rig for the initial portion of the Company's 2012 drilling program comprising a minimum of five wells with an option for an additional five wells;
• Spudding and drilling the Chamberlin 4-2 well, the initial well drilled by the Company at its recently acquired 6,200 net acre Chamberlin lease in the Zaca Field Extension Project ("Zaca") in Santa Barbara County, California, to a total depth of 6,679 feet;
• Encouraging initial results from the Chamberlin 4-2 well which encountered oil shows in a number of sections and, in particular, penetrated more than 900 feet of continuous, strong oil shows in a section of Monterey consistent with the most productive sections at the existing Zaca field and elsewhere in the Santa Maria Basin; and
• Receipt of the year-end reserve evaluation conducted by GLJ Petroleum Consultants Ltd. ("GLJ") of Calgary, the Company's independent reserve engineers, dated April 12, 2012 and evaluating the Company's proved, probable, and possible reserves as at December 31, 2011 in accordance with the Canadian standards and requirements of National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities.

"In the fourth quarter we successfully completed a transaction that allowed us to substantially increase our land position in California and provided us with a number of near-term development and exploration opportunities," said Michael Kobler, President and CEO of Underground. "Immediately following the closing of the transaction, we moved rapidly to shoot new seismic at Zaca and to complete preparations for our 2012 drilling program, culminating in the spudding of our first well in February 2012. We also secured an independent third party reserve report as at December 31, 2011 which  validates the purchase price of the assets acquired and provides a solid base from which we will grow as our drilling and seismic programs continue. Through the early part of 2012 our entire team has worked to aggressively advance our exploration program and we will continue to implement our initial five well drilling program through the balance of 2012 and to build upon the encouraging results from our initial well (Chamberlin 4-2).  These activities highlight our strategy to de-risk the company by diversifying the asset base, from primarily exploration prospects to also include lower risk drilling of offset development wells."

Financial Review	As at	As at
	December 31, 2011	December 31, 2010
Cash and cash equivalents	14,646,951	427,730
Property, plant and equipment	5,138,369	39,688
Exploration and evaluation assets	5,377,653	443,497
Total assets	27,519,369	1,103,985
Long term liabilities	99,012	-
	12 months ended	12 months ended
	December 31, 2011	December 31, 2010
Net loss	10,164,978	1,917,560
Net loss per share - basic & diluted	(0.08)	(0.04)

Cash and Cash Equivalents

As a development stage company, Underground constantly consumes cash for its operating activities and for its investing activities.  During the first half of the year shareholders provided financial support by purchasing common stock and warrants amounting to $6,529,880, net of issuance costs.  During the third quarter the Company closed a $25,499,300 brokered private placement transaction ($23,364,124 after issuance costs).

Business Combination

Effective October 1, 2011, the Company acquired working interests ranging from 70% to 80% in projects comprising 30,151 net acres of oil and gas leases in California.  With this acquisition, the company acquired three producing wells and multiple exploitation and exploration prospects in the San Joaquin and Santa Maria basins in California.  As at the date of this announcement, two of the three wells acquired are out of service.

In the three months to December 31, 2011, the working interests contributed revenue of $0.2 million and losses of $0.9 million. The Company has moved to rationalize and improve the operations acquired.

Identifiable assets acquired and liabilities assumed:
Property, plant and equipment	$	3,482,661
Exploration and Evaluation assets		1,952,656
Joint venturers' share of pipeline liability		372,766
Pipeline liability assumed		(1,263,185)
Decommissioning liability assumed		(99,012)
Other		178,198
Total cash consideration	$	4,624,084

No goodwill was identified in this transaction, as the cash amount paid is the same as the sum of the identifiable assets and liabilities.

Property Plant and Equipment

Property Plant and Equipment ("PP&E") assets increased by approximately $5,099,000 during the year.  The net increase in PP&E assets was due primarily to acquisitions of oil leases with production in the California Monterey shale of $3,483,000; geological and geophysical work and lease acquisitions at the Zaca Extension project of $1,258,000, annual lease payments and other items that totaled $53,000 and corporate asset additions of $422,000, offset by depletion and depreciation totaling $117,000.

Exploration and Evaluation Assets

Exploration and Evaluation ("E&E") assets increased by approximately $4,934,000 during the year.  The net increase in E&E assets was due primarily to oil and gas lease acquisitions in California of $1,953,000; geological and geophysical work at various California projects of $1,880,000, of which $1,540,000 was invested in Asphaltea seismic acquisition and analysis; other oil and gas lease acquisitions and expenditures totaling $1,244,000; and annual lease payments and other items that totaled $355,000.  This spending, totaling $5,432,000, was offset by impairment provisions of $496,000 and a disposition of $2,000 for a net increase of $4,934,000.

Net Loss	Twelve Months
	Ended December 31
	2011	2010
Oil and natural gas revenue	197,738	-
Other income	47,925	-
	245,663	-
Production and operating expense	468,458	-
Exploration and evaluation expense	1,562,019	1,006,233
Administrative expense	7,526,197	913,773
Other expense	738,334	-
Operating loss	10,004,345	1,920,006
Net finance expense (income)	991	(2,446)
Loss before loss of equity accounted investments	10,050,336	1,917,560
Loss of equity accounted investments	114,642	-
Loss and comprehensive loss for the year	10,164,978	1,917,560

Net Loss increased by $8,247,400 compared to last year due to the acquisition of a public listing on the TSXV and due to the build-out of the Company as it developed its oil and gas prospects and increased its land acquisition activities, including:

• Oil and natural gas revenue and production and operating expense increased by $197,738 and $468,458, respectively, due to the acquisition of three producing wells that were included in the oil and gas lease acquisition that closed during the fourth quarter of 2011;
• Exploration and evaluation expense increased by $556,000 compared to last year primarily due to $496,000 in impairments of various properties: $204,000 relates to the costs incurred on the Mustang Flats seismic option prospect in Nevada, the rights to which the Company quit claimed early in 2012 after completion of seismic evaluation, $2,000 relates to money expended in 2011 on an unsuccessful attempt to recomplete a gas well acquired with the large purchase of leases in the fourth quarter, $250,000 relates to the Chu Chua mineral property acquired as part of the merger during the third quarter, and $40,000 with respect to the NW Casmalia property during the second quarter of 2011.  Other factors in the increase, totaling $60,000, are due to the increased level of exploration and evaluation activities - being software and general office expenses;
• Administrative expense increased by $6,612,000 compared to last year primarily due to the $2,867,000 cost of acquiring a listing on TSXV; $440,000 increased professional fees related to the merger with Shenul and becoming a TSXV listed company; $1,700,000 increased personnel cost due to the addition of a fulltime executive team and support staff; $379,000 increase in legal, audit and other professional fees apart from the merger with Shenul; $328,000 increased directors' compensation; and $405,000 increased office, insurance and miscellaneous expenses; $324,000 increased travel and accommodation expenditures related to exploring financing alternatives; $153,000 in investor relations fees and related charges and an increase of $48,000 in depreciation of corporate PP&E.  Those increases were partially offset by a $32,000 warrant liability mark-to-market adjustment; and
• Other expense increased by $738,000 and represents the Company's provision for all of the net billings to its joint interest partners since the acquisition of leases early in the fourth quarter ($428,000) and the joint interest partners' share of future payments under a pipeline financing arrangement ($310,000).

Outlook

The Company is focussed on the drilling program currently underway at its Zaca Extension Project, where its initial well (Chamberlin 4-2) encountered 900 feet of continuous strong oil shows in a new fault block (the "Chamberlin East Block").  The Company's second well (Chamberlin 3-2) is directly targeting the newly discovered Chamberlin East Block and the Company will look to production test and then produce oil from this new block. Thereafter, the Company will look to add further production at Zaca as it continues to implement its 2012 drilling program. At the same time, it will continue to process and acquire additional seismic at Zaca and its other core assets.

To view the Company's Year End 2011 Consolidated Financial Statements, related Notes to the Consolidated Financial Statements, Management's Discussion and Analysis and Annual Information Form, please see the Company's annual filings which will be available on www.sedar.com.

About Underground Energy Corporation

Underground Energy is focused on identifying, acquiring rights to, exploring for, developing and producing oil reserves from shale formations in North America using the latest exploration and recovery techniques and technologies.  Underground focuses on identifying and acquiring sizable land positions and prospects in historically prolific but under-explored shale formations as well as in emerging shale plays that, in both instances, hold large volumes of prospective resources. Underground currently holds hydrocarbon rights on approximately 69,291 net acres of highly 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".  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 statements and forward-looking information within the meaning of applicable securities law (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 the Company's continuation of its 5 well drilling program and the Company's growth strategy and anticipated activities under the heading "Outlook" above.

Although the Company believes 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.  Readers are cautioned that assumptions used in the preparation of forward-looking information may prove to be incorrect.  Consequently, there is no representation that the actual results achieved will be the same, in whole or in part, as those set out in the forward-looking information.

Forward-looking information is based on the opinions and estimates of management at the date the statements are made, and are 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: general economic conditions in Canada, the United States and globally, the risks associated with the oil and gas industry, commodity prices and exchange rate changes.  Industry related risks could 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 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.

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
Consolidated Balance Sheets
(in US dollars)
		December 31,		December 31,		January 1,
			2011		2010		2010
Assets
	Cash and cash equivalents	$	14,646,951	$	427,730	$	309,267
	Restricted cash		1,077,260		-		-
	Accounts receivable		302,422		4,818		-
	Prepaid expenses and deposits		653,370		19,243		9,016
	Loans receivable		167,970		-		-
	Total current assets		16,847,973		451,791		318,283
	Investments		155,374		169,009		135,000
	Property, plant and equipment		5,138,369		39,688		50,763
	Exploration and evaluation assets		5,377,653		443,497		224,100
	Total non-current assets		10,671,396		652,194		409,863
Total assets		$	27,519,369	$	1,103,985	$	728,146
Liabilities
	Accounts payable and accrued liabilities	$	3,144,624	$	561,214	$	85,118
	Warrant liability		448,000		-		-
	Total current liabilities		3,592,624		561,214		85,118
	Decommissioning obligations provision		99,012		-		-
Total liabilities			3,691,636		561,214		85,118
Equity
	Share capital		37,590,330		5,028,198		3,403,315
	Share-based payment reserve		1,324,286		433,625		241,205
	Deficit		(15,086,883)		(4,919,052)		(3,001,492)
	Total equity		23,827,733		542,771		643,028
	Commitments and contingencies
	Subsequent events
Total equity and liabilities		$	27,519,369	$	1,103,985	$	728,146

UNDERGROUND ENERGY CORPORATION
Consolidated Statements of Comprehensive Loss
(in US dollars)
		Year Ended December 31
			2011		2010
Revenues
Oil and natural gas revenue		$	197,738	$	-
Other income			47,925		-
			245,663		-
Expenses
Production and operating			468,458		-
Exploration and evaluation			1,562,019		1,006,233
Administrative			7,526,197		913,773
Other expenses			738,334		-
			10,295,008		1,920,006
Operating Loss			10,049,345		1,920,006
Finance income			26,408		2,446
Finance expense			27,399		-
Net finance expense (income)			991		(2,446)
Loss Before Loss of Equity Accounted Investments			10,050,336		1,917,560
Share of loss of equity accounted investments			114,642		-
Loss and comprehensive loss for the year		$	10,164,978	$	1,917,560
Loss per share:
	Basic and diluted	$	(0.08)	$	(0.04)

.

UNDERGROUND ENERGY CORPORATION
Consolidated Statements of Changes in Equity
(in US dollars)
	Number of ordinary shares		Share capital		Share- based payment reserve		Deficit		Total equity
Balance at January 1, 2010	45,075,496	$	3,403,315	$	241,205	$	(3,001,492)	$	643,028
Issue of ordinary shares	11,258,840		1,624,883		-		-		1,624,883
Share-based payments	-		-		192,420		-		192,420
Loss for the year	-		-		-		(1,917,560		(1,917,560)
Balance at December 31, 2010	56,334,336	$	5,028,198	$	433,625	$	(4,919,052)	$	542,771

Number of shares has been adjusted to reflect the reverse takeover

	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	134,440,376		32,177,450		-		-		32,177,450
Share issuance costs, net of tax of $nil	-		(2,283,446)		-		-		(2,283,446)
Options exercised	1,477,667		54,528		(10,500)		-		44,028
Shenul Capital Inc. shares outstanding brought forward upon merger	9,900,000		-		-		-		-
Net assets of Shenul Capital Inc. acquired upon merger	-		2,613,600		42,667		-		2,656,267
Share-based payments	-		-		858,494		-		858,494
Non-cash dividends paid	-		-		-		(2,853)		(2,853)
Loss for the year	-		-		-		(10,164,978)		(10,164,978)
Balance at December 31, 2011	202,152,379	$	37,590,330	$	1,324,286	$	(15,086,883)	$	23,827,733

Number of shares has been adjusted to reflect the reverse takeover

UNDERGROUND ENERGY CORPORATION
Consolidated Statements of Cash Flows
(in US dollars)
		Year Ended December 31
			2011		2010
Cash flows from operating activities:
Loss for the year		$	(10,164,978)	$	(1,917,560)
Adjustments for:
	Share of loss of equity accounted investments		114,642		-
	Depletion, depreciation and amortization		116,735		21,881
	Impairment losses on exploration and evaluation assets		496,082		-
	Joint venturers' share of pipeline obligation		372,766		-
	Gain on sale of exploration and evaluation assets		(47,925)		-
	Non-cash TSX-V listing expense		2,867,096		-
	Share-based compensation		773,619		192,420
	Warrant liability, mark-to-market adjustment		(32,000)		-
	Net finance expenses (income)		991		(2,446)
	Foreign exchange		(8,730)		1,064
	Interest paid		(18,668)		-
Change in non-cash working capital, operating activities			414,829		461,051
Net cash used in operating activities			(5,115,541)		(1,243,590)
Cash flows from investing activities:
	Additions to property, plant and equipment		(1,732,755)		(10,806)
	Additions to exploration and evaluation assets		(3,101,868)		(219,397)
	Acquisition of oil and gas leases		(4,624,084)		-
	Proceeds from sale of exploration and evaluation assets		50,000		-
	Investment in Careaga Sand and Asphalt Company		(2,853)		-
	Investment in restricted cash		(1,077,260)		-
	Interest income received		26,407		1,382
	Increase in investments		(101,007)		(34,009)
	Cash acquired from Shenul		2,817		-
Net cash used in investing activities			(10,560,603)		(262,830)
Cash flows from financing activities:
	Proceeds from issue of share capital		32,134,783		1,627,000
	Share issuance costs		(2,283,446)		(2,117)
	Proceeds upon exercise of options		44,028		-
Net cash from financing activities			29,895,365		1,624,883
Change in cash and cash equivalents			14,219,221		118,463
Cash and cash equivalents beginning of year			427,730		309,267
Cash and cash equivalents end of year		$	14,646,951	$	427,730

 

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

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