Underground Energy Corporation announces Q3 2012 financial results

SANTA BARBARA, CA, Nov. 29, 2012 /CNW/ - Underground Energy Corporation ("Underground", "UGE" or the "Company") (TSX VENTURE SYMBOL: UGE; OTCQX:  UGGYF) today announced its financial results for the three and nine months ended September 30, 2012.  All amounts are in US dollars unless otherwise noted and these results have been prepared in accordance with International Financial Reporting Standards ("IFRS").

Financial Results

• Loss for the three months ended September 30, 2012 $2,943,867, $0.01 per share (three months ended September 30 2011 - $4,476,953, $0.03 per share)
• Loss for the nine months ended September 30, 2012 $10,401,820, $0.05 per share (nine months ended September 30, 2011 - $6,359,763, $0.06 per share)
• Working capital deficit at September 30, 2012 - $1,547,443 (December 31, 2011 working capital - $13,255,349)
• Cash investment in oil and natural gas interests of $10,994,841 for the nine months ended September 30, 2012
• Cash investment in exploration and evaluation assets of $1,615,674 for the nine months ended September 30, 2012

Recent Highlights

During Q3, we:

• Modified the facilities at Burrel to correct operational issues inherited from the prior operator.  Since Gabriel 1-35 went back on production, it has been pumping at an average rate of 50 barrels of oil per day ("bopd").
• Tested Chamberlin 2-2 at the Zaca Field Extension Project ('Zaca') resulting in production of 30 bopd during a 61-hour test period, from the bottom one-third of the productive zone.  We moved Chamberlin 2-2 off production, pending additional completion operations.
• Installed a higher capacity pump on Chamberlin 3-2 in order to handle the larger than expected amounts of fluid; and conducted a series of production tests.  During the initial ten-hour production test, the well pumped at daily rates of approximately 1,100 barrels of fluid, including 42 bopd.  We suspended the testing of the Chamberlin 3-2 well, pending the availability of cost effective water disposal.
• Received the results of a resource evaluation conducted by Netherland, Sewell and Associates, Inc. - Dallas-based independent petroleum consultants - the results of which are set forth in the Company's press release dated August 22, 2012

Highlights subsequent to quarter-end include:

• Executed a letter of intent ("LOI") to farm-out a portion of our Zaca project to Sovereign Resources LLC whereby Sovereign will joint venture on and have the right to earn up to a 75% working interest in 2,857 gross acres of the Northwest corner of Zaca.  Under the terms of the agreement, Sovereign will enter into a continuous drilling program to drill a maximum of seven wells to earn its full working interest.  UGE will be carried for wells one and two; thereafter UGE will have the right, but not the obligation, to pay their share of drilling and related costs for each subsequent well.  Closing of this arrangement will be through execution of a Farm out Agreement.  Discussions are underway on that agreement.
• Executed a LOI with AmRich Energy, Inc. ("AmRich') whereby AmRich will farm-in on and have the right to earn up to a 75% working interest in 1,062 gross acres of the Central Southern section of Zaca.  Under the terms of the agreement, AmRich will enter into a continuous drilling program of up to 3 wells to earn its full working interest and acreage position.  AmRich will carry UGE on the drilling and completion costs of these initial 3 wells and also the costs of installing facilities and infrastructure to support the wells.  A Farm out Agreement was executed November 21^st.  Final closing remains subject to certain conditions.
• Raised $691,000 via a financing of convertible secured debentures of the Company.

Financial Review
Selected Financial Highlights	As at	As at
	September 30, 2012	December 31, 2011
Cash and cash equivalents	869,298	14,646,951
Oil and natural gas interests	15,757,790	4,778,378
Exploration and evaluation assets	1,132,505	5,377,653
Total assets	20,642,423	27,519,369
	3 months ended	3 months ended
	September 30, 2011	September 30, 2011
Net loss	(2,943,867)	(4,476,953)
Net loss per share - basic & diluted	(0.01)	(0.03)

 

As a development stage company, we constantly consume cash for our operating activities and for our investing activities.  Subsequent to quarter-end, the Company's working capital has improved to an estimated deficiency $1,268,923 as of the date of this announcement.  Subsequent to September 30, 2012, the Company closed convertible secured debenture offerings totaling $621,000 on October 4^th with officers and directors and totaling $70,000 on November 16^th with independent investors.  The Company is actively seeking a buyer for one of its exploration and evaluation properties.  A non-refundable $100,000 deposit received in July was forfeited by a potential buyer on a transaction that failed to close.  There is doubt that without additional financing or the sale of non-core properties, that the Company possesses adequate cash to maintain its operations.  Accordingly, as required under applicable rules of IFRS, a going concern note has been included in the required form in Note 1 to the Company's unaudited condensed interim consolidated financial statements.

Oil & natural gas interests increased by approximately $11,000,000 since year-end and $1,335,000 during Q3, due primarily to Zaca drilling & completions.

Exploration and evaluation ("E&E") assets decreased by approximately $4,250,000 since year-end and decreased $1,220,000 during Q3.  The decrease in E&E assets during the quarter was due to $840,000 of impairment of prospects and $380,000 for the reclassification of the property under an option agreement to exploration assets held for sale.

Results of operations
	Three Months		Nine Months
	Ended September 30		Ended September 30
	2012	2011	2012	2011
Oil and natural gas revenues	222,227	-	522,156	-
Other income	100,000	-	100,000	47,925
Revenues	322,227	-	622,156	47,925
Production and operating expense	797,867	-	1,716,698	-
Exploration and evaluation expense	1,693,817	609,834	5,932,595	1,094,573
Administrative expense	762,456	3,868,813	3,348,119	5,306,697
Other expense	7,933	-	10,155	-
Net finance expense (income)	4,021	(1,694)	7,920	6,418
Share of loss of equity accounted investments	-	-	8,489	-
Net loss	2,943,867	4,476,953	10,401,820	6,359,763

 

Net Loss decreased by $1,535,000 compared to the same quarter last year due to the cost of the merger with Shenul Capital Inc. being included in 2011, offset by operating losses and impairments of exploration and evaluation assets.

• Oil and natural gas revenues increased by $220,000 compared to the same quarter last year due to oil production from the Gabriel 1-35 oil well at Burrel Deep.
• Other income increased by $100,000, due to a forfeited non-refundable deposit made on the purchase of certain oil and gas leases.
• Production and Operating Expense increased by $800,000 compared to the same quarter last year due to the commencement of operations.
• Exploration and Evaluation ("E&E") Expense increased by $1,085,000 compared to the same quarter last year primarily due to the impairment provision on exploration and evaluation assets of $840,000 in 2012 plus the charging of all exploration and evaluation expenditures in Q2 and Q3 of 2012 to E&E expense.  As exploration and evaluation properties are stated at the expected recoverable amount, expenditures on exploration are expensed in Q2 and Q3 2012, whereas they were added E&E Assets in 2011.
• Administrative Expense decreased by $3,110,000 compared to the same quarter last year primarily due to the costs of the merger in 2011 with Shenul Capital Inc. not repeating in 2012.

Outlook

Upon, and subject to, receipt of additional capital, we plan to:

• Permit and commission a water disposal well at Zaca, which we expect to reduce our water disposal costs from the current $9.75/barrel of water to $0.20/barrel of water.  This will allow us to flow the Chamberlin 3-2 well with an economic cost structure; and
• Stimulate and bring Chamberlin 1-2 back on line at Zaca (production of approximately 10 bopd was previously suspended to allow drilling of Chamberlin 2-2, off the same drilling pad).
• Apply additional completion operations on Chamberlin 2-2, which we expect to bring this well's production in line with the infill drilling done nearby in the 1970's through the 1990's when wells averaged optimized production rates of 70 bopd and 375,000 barrels cumulative oil recovery.

To view the Company's Third Quarter 2012 Unaudited Condensed Interim Financial Statements, related Notes to Unaudited Condensed Interim Financial Statements, and Management's Discussion and Analysis, please see the Company's quarterly filings which will be available on www.sedar.com. Further information is available on the Company's website www.ugenergy.com.

About Underground Energy Corporation

Underground is focused on developing its Zaca Field Extension Project in Santa Barbara County, California.  In total, Underground currently holds mineral rights on approximately 64,000 net acres of prospective lands in California and Nevada with an initial focus on the Monterey Shale in California. For more information on Underground, 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 information and forward-looking statements within the meaning of applicable securities laws (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: (i) the terms of and timing for the farm-out agreements to be entered into with AmRich Energy, Inc. and Sovereign Resources LLC; and (ii) the statements set forth under the heading titled "Outlook" in respect of the Company's planned future operations and results therefrom; and (iii) the Company's plans for raising additional capital and its further plans for the use of such capital. 

Although we believe 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. Certain or all of the forgoing assumptions may prove to be untrue.

Forward-looking information is based on the opinions and estimates of management at the date the statements are made, and is 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: 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 and resource 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.

The well test results set forth in this press release are not necessarily indicative of long-term performance or of ultimate recovery.

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
Condensed Interim Consolidated Statements of Financial Position

(in US dollars) | (unaudited)

			September 30, 2012		December 31, 2011
Assets
	Cash and cash equivalents	$	869,298	$	14,646,951
	Restricted cash		156,384		1,077,260
	Accounts receivable		481,012		302,422
	Prepaid expenses and deposits		719,197		653,370
	Loans receivable		-		167,970
	Exploration property held for sale		1,122,458		-
	Total current assets		3,348,349		16,847,973
	Investments		111,757		155,374
	Property, plant and equipment		16,049,812		5,138,369
	Exploration and evaluation assets		1,132,505		5,377,653
	Total non-current assets		17,294,074		10,671,396
Total assets		$	20,642,423	$	27,519,369
Liabilities
	Accounts payable and accrued liabilities	$	4,767,792	$	3,144,624
	Warrant liability		128,000		448,000
	Total current liabilities		4,895,792		3,592,624
	Loans and borrowings		13,384		-
	Decommissioning obligations provision		210,747		99,012
Total liabilities			5,119,923		3,691,636
Equity
	Share capital		38,186,408		37,590,330
	Share-based payment reserve		2,824,795		1,324,286
	Deficit		(25,488,703)		(15,086,883)
Total equity			15,522,500		23,827,733
	Going concern
	Subsequent events
	Commitments
Total equity and liabilities		$	20,642,423	$	27,519,369

UNDERGROUND ENERGY CORPORATION
Condensed Interim Consolidated Statements of Comprehensive Loss

(in US dollars) | (unaudited)

		Three Months				Nine Months
		Ended September 30				Ended September 30
		2012		2011		2012		2011
Revenues
Oil and natural gas revenue	$	222,227	$	-	$	522,156	$	-
Other income		100,000		-		100,000		47,925
		322,227		-		622,156		47,925
Expenses
Production and operating		797,867		-		1,716,698		-
Exploration and evaluation		1,693,817		609,834		5,932,595		1,094,573
Administrative		762,456		3,868,813		3,348,119		5,306,697
Loss on divestiture of property, plant and
equipment assets		7,933		-		10,155		-
		3,262,073		4,478,647		11,007,567		6,401,270
Operating Loss		2,939,846		4,478,647		10,385,411		6,353,345
Finance income		(768)		(9,907)		(11,634)		(13,896)
Finance expense		4,789		8,213		19,554		20,314
Net finance expense (income)		4,021		(1,694)		7,920		6,418
Loss before loss of equity accounted investments		2,943,867		4,476,953		10,393,331		6,359,763
Share of loss of equity accounted investments		-		-		8,489		-
Loss and comprehensive loss for the period	$	2,943,867	$	4,476,953	$	10,401,820	$	6,359,763
Loss per share:
Basic and diluted	$	(0.01)	$	(0.03)	$	(0.05)	$	(0.06)

UNDERGROUND ENERGY CORPORATION
Condensed Interim Consolidated Statements of Changes in Equity

(in US dollars) | (unaudited)

		Number				Share-
		of				based
		ordinary		Share		payment				Total
		shares		capital		reserve		Deficit		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		1,211,000		17,500		-		-		17,500
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		-		-		172,027		-		172,027
Non-cash dividends paid		-		-		-		(2,853)		(2,853)
Loss for the period		-		-		-		(6,359,763)		(6,359,763)
Balance at September 30, 2011		201,885,712	$	37,553,302	$	$ 648,319	$	(11,281,668)	$	26,919,953

Number of shares has been adjusted to reflect the corporate merger, which is described in note 13 of the Audited Consolidated Financial Statements for the year ended December 31, 2011.

		Number				Share-
		of				based
		ordinary		Share		payment				Total
		shares		capital		reserve		Deficit		equity
Balance at December 31, 2011		202,152,379	$	37,590,330	$	1,324,286	$	(15,086,883)	$	23,827,733
Warrants exercised		2,749,906		596,078		-		-		596,078
Share-based payments		-		-		1,500,509		-		1,500,509
Loss for the period		-		-		-		(10,401,820)		(10,401,820)
Balance at September 30, 2012		204,902,285	$	38,186,408	$	2,824,795	$	(25,488,703)	$	15,522,500

 

UNDERGROUND ENERGY CORPORATION
Condensed Interim Consolidated Statements of Cash Flows

(in US dollars) | (unaudited)

					Three Months				Nine Months
					Ended September 30				Ended September 30
					2012		2011		2012		2011
Cash flows from operating activities:
Loss for the period				$	(2,943,867)	$	(4,476,953)	$	(10,401,820)	$	(6,359,763)
Adjustments for:
	Share of loss of equity accounted
	investments				-		-		8,489		-
	Depletion, depreciation and amortization				66,601		19,904		170,969		48,916
	Impairment losses on exploration and
	evaluation assets				871,065		250,247		4,738,774		291,652
	Loss on divestiture of PP&E assets				7,933		-		10,155		-
	Gain on sale of exploration and evaluation
	assets				-		-		-		(47,925)
	Accretion of decommissioning obligations				736		-		1,299		-
	Share-based compensation				236,174		63,102		1,500,509		214,694
	Warrant liability, mark-to-market adjustment				(160,000)		(128,000)		(320,000)		(128,000)
Change in non-cash working capital,
	operating activities				127,392		2,344,377		(1,572,247)		2,052,456
Net cash used in operating activities					(1,793,966)		(1,927,323)		(5,863,872)		(3,927,970)
Cash flows from investing activities:
Additions to property, plant and equipment					(1,358,707)		(57,879)		(10,994,841)		(189,556)
Additions to exploration and evaluation assets					-		(1,465,400)		(1,615,674)		(2,950,661)
Proceeds from sale of exploration and
	evaluation assets				-		-		-		50,000
Investment in Subset Energy, LLC					-		-		35,128		-
Investment in Careaga Sand and Asphalt Company					-				-		(2,853)
Proceeds from sale of PP&E assets					12,300		-		12,300		-
Reduction in restricted cash					320,270		-		920,876		-
Change in non-cash working capital,
	investing activities				(611,847)		-		2,597,968		-
Net cash used in investing activities					(1,637,984)		(1,523,279)		(9,044,243)		(3,093,070)
Cash flows from financing activities:
Proceeds from issue of share capital					-		25,499,300		-		32,177,450
Share issuance costs					-		(2,135,175)		-		(2,283,446)
Proceeds from (repayments on) loans					(843)		-		13,384		-
Proceeds upon exercise of warrants					-		-		596,078		-
Proceeds upon exercise of options					-		17,500		-		17,500
Change in non-cash working capital,
	financing activities				521,000		-		521,000		-
Net cash from financing activities					520,157		23,381,625		1,130,462		29,911,504
Change in cash and cash equivalents					(2,911,793)		19,931,023		(13,777,653)		22,890,464
Cash and cash equivalents beginning of period					3,781,091		3,387,171		14,646,951		427,730
Cash and cash equivalents end of period				$	869,298	$	23,318,194	$	869,298	$	23,318,194

 

 

 

 

SOURCE: Underground Energy Corporation

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

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