Cirrus Energy Corporation Announces August 31, 2010 Financial Results

CALGARY, Dec. 16 /CNW/ -- CALGARY, Dec. 16 /CNW/ - Cirrus Energy Corporation (TSXV: CYR) ("Cirrus") announces its results for the year ended August 31, 2010.
Fiscal 2010 saw the establishment of material cash flow from operations of $11.1 million corresponding to average production from Cirrus' Netherlands properties of 9,314 mcfe/d.

Financial Highlights


    
                                                       August 31,  August 31,
    ($000s unless noted)                                    2010        2009
    -------------------------------------------------------------------------
    Production revenue                                    25,630           -
    Funds from (used in) operations(1)                    11,062      (2,478)
      Per share basic and diluted                           0.13       (0.04)
    Net loss from continuing operations                  (24,720)     (5,117)
      Per share basic and diluted                          (0.29)      (0.07)
    Working capital (excluding restricted cash
     and borrowing base facility)                         35,640      25,909
    Restricted cash                                        7,800       8,000
    Borrowing base facility                               15,730      10,800
    Working capital                                       27,711      23,109
    Total assets                                         168,304     164,381
    Shareholders' equity                                 106,585      93,984
    Capital expenditures                                  50,874      61,530
    Average common shares outstanding (thousands)         86,178      71,401
    -------------------------------------------------------------------------
    (1) Funds from continuing operations is a non-GAAP measure that
        represents net earnings from continuing operations adjusted for
        non-cash items and is equal to positive operating cash flow of
        $5.7 million plus the net decrease in non-cash operating working
        capital items of $5.4 million. The Company evaluates its performance
        based on net earnings and funds from continuing operations. The
        Company considers funds from continuing operations a key measure as
        it demonstrates the Company's ability to generate cash flow necessary
        to fund future growth through capital investment and to repay debt.
    


Operating Highlights


    
                                           August 31,  August 31,
                                                2010        2009    % change
    -------------------------------------------------------------------------
    Working interest production
      Natural gas (mcf/d)(1)                   9,176           -           -
      NGL's (bbls/d)(2)                           23           -           -
      Total gas equivalent (mcfe/d)            9,314           -           -
    Average prices
      Natural gas ($/mcf)                       7.48           -           -
      NGL's ($/bbl)                            69.66           -           -
    Operating costs ($/mcfe)                    2.14           -           -
    General and administrative ($/mcfe)         1.08           -           -
    -------------------------------------------------------------------------
    (1) Based on continuing operations. The Company's Trinidad operations are
        excluded from these highlights as they have been accounted for as
        discontinued (see note 7 to the consolidated financial statements).

    (2) Based on total natural gas production from properties in The
        Netherlands averaged over the entire twelve months, irrespective of
        production start date.
    


Summary of Key Events

Production

M07-A Field (Cirrus working interest - 42.75%)

Cirrus successfully completed the drilling and testing of the operated M07-A01 production well on the M07-A Field during the first fiscal quarter of 2010. The well was tied-in to the fully commissioned M07-A platform and export facilities and production commenced on September 12, 2009. Production performance from the M07-A01 well on the M07-A field was as expected during the year. Production was shut-in during June and July 2010, due to the planned shutdown of the third party L09-FF processing platform for routine annual maintenance. Production at M07-A01 recommenced on July 21, 2010 at increased gross rates of 31.7 MMscf/d (13.6 MMscf/d net to Cirrus's working interest) reflecting revised contractual off-take terms. Including the impact of the extended shutdown period, average working interest production sales from the M07-A field for the fiscal year of 2010 were reported at 7.2 MMscf/d.

L08-D Field (Cirrus working interest - 25.479%)

Production at the L11b-A06 well on the L08-D field commenced October 4, 2009 and while high initial decline rates on this well were expected, production performance declined more rapidly than anticipated. Field testing work was undertaken during the second and third fiscal quarters of 2010 with findings that all three perforated gas sands were contributing to production in the proportions expected and no evidence of near wellbore damage. It is assumed that the higher than expected initial production declines from the well are due to partial compartmentalization of the reservoir. Average working interest sales of 2.0 MMscf/d reported for the year from the L11b-A06 well on the L08-D field are reflective of the current pulsed intermittent production regime implemented over the third and fourth fiscal quarters of 2010. Recent operational changes at the production platform are expected to ensure the field maintains a positive cash flow even at current average production rates.

Drilling operations

M07-07 (Cirrus working interest - 42.75%)

The deviated M07-07 well, drilled from the M07-A production platform, encountered the top of the prognosed Jurassic-aged sandstone reservoir at a true vertical depth of 2,792 meters sub-sea. The M07-07 appraisal well was initially completed and, upon clean-up flow, tested at a stabilised rate of 268,000 Nm3/d (10.0 MMscf/d) with a flowing well head pressure of 110 bar (1600 psi) through a 36/64" choke. At the end of the initial clean up test, however, it was established that a permanent packer in the completion had failed and was leaking which therefore required replacement. Following a workover to replace the packer, there was damage to the formation as a result of exposure to fluids used to kill the well and only minor gas flow rates were subsequently measured. As a consequence of the low productivity due to formation damage, plus the proximity of the gas-water contact, the existing wellbore is not expected to be used for production purposes.
The well met the pre-drill objective of confirming the presence of a gas-bearing Jurassic reservoir. Detailed engineering design and planning will be undertaken to optimise the design of a potential future sidetrack of the M07-07 well to achieve optimum productivity and recovery of gas from this new reservoir. Evaluation of petroleum initially in place and estimates of recoverable volumes of gas in the new Jurassic pool appraised by M07-07 are included as part of Cirrus' August 31, 2010 year-end reserves audit exercise. Total gross costs expended on the well are estimated as (euro)19.9 million ((euro)8.5 million or approximately $14.6 million net to Cirrus).

M01-04 (Cirrus working interest - 47.5%)

The M01-04 exploration well on the M01-Delta prospect was spud on April 24, 2010 and drilled to a total depth of 3,880 meters. The primary Triassic reservoir target was encountered and, although interpreted as gas-bearing on logs, was of significantly poorer quality than expected with low porosity and no measurable permeability. The well was then plugged and abandoned. Total gross costs of the well are approximately (euro)11.4 million ((euro)5.4 million or approximately $7.3 million net to Cirrus).

L11b-A07 (Cirrus working interest - 25.479%)

The L11b-A07, the second appraisal/development well on the L08-D field, was spud on September 22, 2009. The rig reached total measured depth of 5,840 meters on November 28, 2009 whereafter logging of the reservoir interval commenced. Operational difficulties were subsequently encountered during cementing operations of the liner over the reservoir section. While attempting to disconnect the liner running tool from the liner hanger, the running string parted leaving a fish in the hole that was made up of drill pipe and the liner running tool. After numerous unsuccessful attempts to retrieve the fish, the L08-D Unit partners agreed to sidetrack the well and drill a new lower hole section to the reservoir. Sidetrack activities on the A07 well commenced on December 30, 2009 and a new hole was drilled from 1,270 mMD to 2,066 mMD. Unfortunately, it proved impossible to run casing in this new hole and drilling operations on the A07 well were suspended. Total gross costs expended on the A07 well are approximately (euro)35.0 million ((euro)8.9 million or approximately $13.8 million net to Cirrus).

Natural gas sales price

All gas currently produced by Cirrus is sold to GasTerra, B.V. ("GasTerra"), the predominant gas buyer in The Netherlands. All GasTerra purchase contracts signed with domestic producers in The Netherlands over the past decade have been for the life of the reserves by field or block and utilize a mechanism for price determination by deriving a price based on a formula which includes pricing of competitive fuels (including oil, gas and electricity) in the industrial and residential markets utilizing both domestic and export pricing points. This formula produced a calculated gas price which historically was highly correlated to Brent oil prices with an approximate six month lag. The latest contract price formula commenced on January 1, 2009, however, in February 2010 GasTerra presented all currently contracted Dutch producers with a revision to the existing off-take contract price formula which effectively increased the weighting of prompt (spot) gas pricing (observed at the Dutch TTF Gas Hub) in the formula. The new formula is estimated to be weighted 65% to lagged oil and liquids pricing and 35% to spot natural gas pricing.
During the first five months of calendar 2010, the 2010 GasTerra pricing formula yielded a realized price that was approximately 15% lower than the 2009 GasTerra pricing formula, due to an increased weighting of spot gas in the new formula. Over the fourth fiscal quarter of 2010 spot pricing saw a significant strengthening and thus the Company has seen a strengthening of its realised price which was $8.57/mcf in October, 2010. An average price of $7.48/mcf was reported for fiscal 2010.

Working Capital

The Company is reporting August 31, 2010 working capital (including restricted cash and net of debt) of $27.7 million. Working capital at December 16, 2010 is estimated to be approximately $29.0 million (not including the US$3.5 million proceeds from the announced sale of the Company's Trinidad and Tobago oil and gas properties). With no drilling planned until the second calendar quarter of 2011 and the resumption of production from the M7-A field financial resources are expected to strengthen in the near term.

Borrowing base facility

Subsequent to the year end (September 21, 2010) the Company repaid the outstanding balance, totaling $15.7 million, of its borrowing base facility with The Royal Bank of Scotland plc ("RBS") and canceled the facility. The early repayment and cancellation of the borrowing base facility is expected to save Cirrus approximately $1.0 million in financing charges that would have been incurred over the 16 months remaining on the loan. The borrowing base facility was established to finance the completion of the M07-A development project and to finance the modification work on the L11b-A platform that was required to tie-in the L11b-A06 development well. With these projects now completed and providing material cash flow, it was determined that there is no further benefit in maintaining the facility.

Management Appointments

Effective August 1, 2010, John Bell has been appointed as Interim Vice President Finance and Chief Financial Officer. John, a Chartered Accountant, joined Cirrus in November, 2009 as Controller and was previously Controller at Zapata Energy Corporation.
Effective August 16, 2010, Theo Bergers has been appointed as Managing Director of Cirrus Energy Nederland B.V. Theo has extensive international and North Sea experience in a variety of technical and senior management roles, most recently as Operations Manager for Wintershall in Libya. Theo started his career in 1975 as a production engineer with Shell working in The Netherlands, Oman, Brunei and Shell Expro in the UK prior to moving to Clyde Petroleum in 1990 where he was responsible for the operation and development of Clyde's operated assets in The Netherlands which were acquired by Wintershall in 2002. Theo brings a wealth of directly relevant operational experience to Cirrus' activities in the Dutch North Sea.

Financial and operating highlights

The Company reported funds from continuing operations of $11.1 million and a net loss of $24.7 million primarily as a result of depletion expense of $34.4 million. Production sales of 7.2 MMscf/d and 2.0 MMscf/d (net to the Company's working interest), were reported during fiscal 2010 from M07-A field and L08-D field respectively. An average price of $7.48/mcf was recorded during the fiscal year, while operating expenses were recorded at $2.14/mcf. Royalty rates were constant during the twelve month period ending August 31, 2010 at 10% for the M07-A field and 7.9% for the L08-D field. Operating netbacks of $4.59/mcf were recorded in fiscal 2010.

Outlook

Subsequent to year end the Company incurred an unscheduled production outage (from September 8th to November 5th 2010) on the M07-A field due to gas process equipment failures on the third party processing platform, L09-FF. Whilst the operator of L09-FF has affected repairs thereby allowing restoration of production there is a possibility that further outages may occur in the future. Cirrus believes it has engineered a permanent solution to avoid the problematic process equipment on L09-FF which it is hoped can be implemented in mid calendar 2011.
Cirrus activities and future plans are supported by the continuing strong pricing environment for Dutch gas. Despite the contract changes in 2010 which reduced the strength of the linkage between Dutch gas prices and oil prices, realized prices have steadily improved during calendar 2010, reaching $8.57/mcf in October, 2010. Furthermore, netbacks for our main cash flow base at M07-A are high and average about 70% of the gross sales price.
In fiscal 2011, the Company is pursuing plans to drill at least two wells; most likely an exploration well on the Q16-Bravo prospect and a sidetrack to the M07-07 well which will be completed as a production well from the M07-A platform. Further development drilling on the L08-D field may follow later in calendar 2011. Cirrus is fully funded for these investment activities.
Further information can be obtained from the Company's Consolidated Financial Statements and Management Discussion and Analysis for the year ended August 31, 2010 which have been filed with securities regulatory authorities in Canada. These documents are available on the System for Electronic Document Analysis and Retrieval at www.sedar.com.

Cirrus Energy Corporation is an international oil and gas Company headquartered in Calgary and currently has approximately 91.1 million fully diluted common shares outstanding.

Forward-Looking Statements

This press release may include forward-looking statements including opinions, assumptions, estimates and expectations of future production, cash flow and earnings. When used in this document, the words "anticipate", "believe", "estimate", "expect", "intent", "may", "project", "plan", "should" and similar expressions are intended to be among the statements that identify forward-looking statements. Forward-looking statements are subject to a wide range of risks and uncertainties, and although the Company believes that the expectations represented by such forward-looking statements are reasonable there can be no assurance that such expectations will be realized. Any number of important factors could cause actual results to differ materially from those in the forward-looking statements including, but not limited to, the volatility of oil and gas prices, the ability to implement corporate strategies, the state of domestic capital markets, the ability to obtain financing, changes in oil and gas acquisition and drilling programs, operating risks, production rates, reserve estimates, changes in general economic conditions and other factors more fully described from time to time in the reports and filings made by Cirrus with securities regulatory authorities.


    
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David Taylor, President and Chief Executive Officer, John Bell, Vice President, Finance and Chief Financial Officer, Cirrus Energy Corporation, Suite 208, 5 Richard Way SW, Calgary, Alberta T3E 7M8, Canada, Website: www.cirrusenergy.ca, Telephone: [phone], Facsimile: [phone]

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