Petrominerales Ltd. ("Petrominerales" or the "Company") (TSX:PMG)(BVC:PMGC) is pleased to announce our second quarter results highlighted by funds flow from operations of US$194.7 million or US$1.88 per share. We are also pleased to announce our successful Cobra exploration well is producing over 4,000 barrels of oil per day ("bopd"). Production averaged 40,308 bopd in the quarter and we grew our operating netbacks to US$69.59 per barrel, a 37 percent increase over 2010. Our balance sheet remains strong with a working capital surplus and undrawn bank facilities. This financial flexibility gives us the strength to continue to execute our aggressive exploration and development plans in Colombia and Peru.
FINANCIAL & OPERATING HIGHLIGHTS
The following table provides a summary of Petrominerales' financial and operating results for the three and six months ended June 30, 2011 and 2010. Consolidated financial statements with Management's Discussion and Analysis ("MD&A") are now available on the Company's website atwww.petrominerales.com and will also be available on the SEDAR website at www.sedar.com.
HIGHLIGHTS AND SIGNIFICANT TRANSACTIONS DURING THE SECOND QUARTER
(Comparisons are second quarter 2011 compared to the second quarter of 2010 unless otherwise noted)
- We reported record revenue, funds flow from operations and net income in the second quarter.
- Funds flow from operations was $194.7 million, or $1.88 per basic share, 11 and 6 percent increases over 2010.
- Net income of $215.7 million included a $101.8 million non-cash gain from new accounting treatment under International Financial Reporting Standards ("IFRS") for our convertible debentures. Net income adjusted for this item was $113.9 million in the quarter, or $1.10 per basic share, 19 and 15 percent increases over the comparable 2010 period.
- We drilled six exploration wells with four successes in the quarter including our Macapay-1 discovery well that came on production at rates of over 3,500 bopd.
- Subsequent to June 30, we completed drilling two wells; Cobra-1 was placed on production at the beginning of August at over 4,000 bopd and well logs indicate 89 feet of potential net oil pay in our Babaco-1 well, which is being cased as a potential oil well.
- Our operating netbacks increased to $69.59 per barrel in the second quarter, a 37 percent increase over 2010, primarily due to higher world oil prices.
- We acquired a five percent interest in the Oleoducto Central S.A. ("Ocensa") crude oil pipeline for US$281 million. The Ocensa pipeline is strategic to Petrominerales because it secures pipeline capacity, is the lowest cost option to transport crude oil out of the Llanos Basin, and provides us with access to international oil markets. We expect to commence transporting our crude oil through the Ocensa pipeline starting September 1.
- Our balance sheet remains strong. We ended the quarter with a working capital surplus of $511.7 million, and after paying for our recent Ocensa pipeline acquisition, our cash and working capital exceeds $200 million.
- We began repurchasing our common shares under a normal course issuer bid ("NCIB") during the quarter. Petrominerales is authorized to purchase up to 8,212,601 shares under the NCIB. Since the NCIB started, we have repurchased 1,864,300 shares, representing nearly two percent of our outstanding common shares, at an average price of Cdn.$29.08.
- Our common shares began trading on the Colombian Stock Exchange ("BVC") under the symbol "PMGC" on August 3, 2011.
OPERATIONAL REVIEW
Production averaged 40,308 bopd in the second quarter of 2011. Production was consistent with the first quarter of 2011 primarily due to production additions from two new wells on the Corcel Block (Macapay-1 and Cardenal-1) and one well on the Castor Block (Capybara-2), offset by natural wells declines and certain wells being offline for workovers.
Production averaged 38,437 bopd in the month of July. Production was eight percent lower than June primarily due to certain wells being off-line for workovers, including Corcel-C2 and Boa-2 for 22 and 31 days, respectively. Our Cobra-1 well was brought on production at over 4,000 bopd and our current production is now over 42,000 bopd, before production additions from the Candelilla-3 side-track and Corcel-C2 wells that we expect to bring back on production during the month of August.
Deep Llanos Basin (Corcel, Guatiquia and South Block 31), Colombia
During the second quarter we drilled three Deep Llanos exploration wells (Azalea-1, Macapay-1, Camoruco-1), bringing our Deep Llanos year-to-date 2011 exploration well count to seven wells. In addition, the Cobra-1 and Babaco-1 wells finished drilling in July.
On the Corcel Block, we drilled and cased the Macapay-1 exploration well in the northeast part of our Corcel Block. The well reached total measured depth of 13,772 feet on May 5, 2011. Well logs indicated 25 feet of potential net oil pay in the Lower Sand 1 formation. After testing two intervals, we placed the well on production June 17th on natural flow at over 3,500 bopd.
On July 4, 2011, we completed drilling the Camoruco-1 exploration well located in the northeast part of our Corcel Block. Based on our analysis, the well did not have commercial hydrocarbon pay and it was cased for water disposal purposes.
Our Cobra-1 exploration well was drilled to a total measured depth of 12,000 feet and well logs indicated 121 feet of potential net oil pay, 51 feet in the Guadalupe formation and 70 feet in the Lower Sand 1 formation. We placed the well on production in the Lower Sand 1 formation with an electric submersible pump ("ESP") at the beginning of August at over 4,000 bopd of 16 degree API oil at less than one percent water cut. Based on this result, we are planning a second Cobra well to target the by passed pay in the Guadalupe formation.
On our Guatiquia Block, we completed drilling the Azalea-1 exploration well on April 8th. The well targeted a separate structure immediately southwest of our Candelilla discovery. We tested oil from two separate intervals in the Lower Sand formations. In June, we placed the well on production from these intervals with an ESP at production rates of over 900 bopd, however, the well has been shut-in awaiting a work-over to isolate the productive Lower Sand formations.
In July, we completed drilling a side-track to our Candelilla-3 well and we expect to place the well back on production within a week.
Production from Candelilla, Yatay and Azalea is currently being handled through temporary production facilities ("Percheron Facility") built on the Guatiquia Block. We installed flow-lines between the Percheron Facility and our Corcel central processing facility and we expect to tie-in the light oil production by the end of the third quarter. In addition, we have begun construction of a central processing facility in the northeast part of the Corcel Block that is expected to be able to handle up to 40,000 barrels of fluid per day in the third quarter. This northeast facility is currently 40 percent complete.
On Block 31, we recently completed drilling our first exploration well, Babaco-1, to a total measured depth of 14,155 feet. Based on well logs indicating 89 feet of potential net oil pay in the Lower Sand 1 formation, we cased the well as a potential oil producer. We expect to have production test results from this well by the end of August.
We currently have three drilling rigs operating in the area. On Block 31, Socaco-1 began drilling operations on July 18 and our second rig is currently moving to the Caspio-1 location. At Corcel, our third rig is mobilizing to drill Cobra-2.
Foothills, Llanos Basin, Colombia
We are moving forward with our initial two-well exploration program on Block 25. The drilling rig contracted for these wells is currently in transit to Colombia and we expect to commence drilling the Bromelia-1 prospect late in the third quarter of 2011. The second exploration prospect on Block 25, Canatua-1, is expected to commence drilling in the first quarter of 2012.
Central Llanos Blocks (Casimena, Castor, Casanare Este, Mapache), Colombia
On our Mapache Block, we drilled the Disa-1 well in March and based on hydrocarbon shows while drilling, we cased the well as a potential oil producer. In the final test of a Carbonera C7 interval we encountered 29 degree API oil. The well was brought on production July 9 at a rate of over 1,100 bopd with a 70 percent water cut.
In April, we drilled Capybara-2 on our Castor Block. We drilled the well to total depth of 11,880 feet and completed the well with an ESP. The well was brought on production in mid-May and averaged 1,326 bopd during the remainder of the second quarter. We expect to begin drilling the Zacay-1 prospect on our Casimena Block in September.
On our Casanare Este Block, we recently completed the acquisition of a 116 square kilometre 3D seismic survey, which is currently being processed, and we plan to drill one exploration well in 2012.
Llanos Basin Heavy Oil Blocks (Rio Ariari, Chiguiro Oeste, Chiguiro Este), Colombia
We have one drilling rig operating on our heavy oil acreage where we have been executing a multi-well exploration drilling program primarily focused on our Rio Ariari Block. During the quarter we drilled two exploration wells, Acanto-1 and Azulejo-1, and subsequent to June 30 we completed drilling a third exploration well, Calandria-1.
Acanto-1 was drilled to a total measured depth of 5,731 feet on April 14, 2011. Well logs indicated 52 feet of net oil pay in the Mirador formation. We conducted a multi-zone testing program and recovered trace amounts of hydrocarbons. In addition, while tripping out the bottom hole assembly we discovered that the drill string and bottom hole assembly were completely coated in heavy oil. We also encountered this drilling result with our Anturio, Acanto, Heliconia and Asarina wells. We are currently reviewing these results to design a testing protocol to effectively test these heavy oil zones.
Following Acanto-1, the rig moved to our Chiguiro Este Block and drilled our Azulejo-1 exploration prospect to satisfy an exploration work commitment. The Azulejo-1 prospect was programmed to test a unique play concept with a potentially large closure. We did not encounter measurable hydrocarbon pay in Azulejo-1 and as a result we abandoned the well. The geological information that the well provided allows us to reinterpret our 3D seismic database and provides the opportunity for other play concepts with potentially large closures.
Following Azulejo-1, the rig moved back to the Rio Ariari Block and drilled our Calandria-1 prospect. The well was drilled to a total measured depth of 6,602 feet in July. Well logs indicate 40 feet of net oil pay in the Mirador formation. We plan to conduct a multi-zone testing program and expect to have results by the end of August.
Based on positive results to date from our conventional Rio Ariari exploration program, we are expanding our heavy oil exploration effort with a stratigraphic drilling program that is expected to begin during the fourth quarter of 2011 and continue into 2012. We have provisionally identified 34 locations consisting of 22 exploration locations and 12 step-out locations to existing discoveries. The step-out locations will help define the lateral extent of some of our existing discoveries while providing stratigraphic control for two initial horizontal wells, one at Mochelo and a second location to be defined based upon ongoing exploration well results. These horizontal wells will be indicative of commercial production rates in a conventional primary production development scenario and will help move us one step closer to a large scale commercial development.
In the first quarter, we initiated a large 369 square kilometre 3D seismic program on the western half of our Rio Ariari Block that is covering the area of our recent drilling activity. The acquisition portion of this 3D survey is expected to finish during the third quarter. This seismic data, along with the stratigraphic drilling program will delineate the arial extent of our existing exploration successes and help define our next phase of exploration drilling on the Rio Ariari Block.
Antorcha, Middle Magdalena Basin, Colombia
As part of our stratigraphic drilling program, we plan to drill two wells on this Block in the third quarter to test two separate exploration concepts.
Orito, Putumayo Basin Colombia
On May 1, 2011, we mobilized a drilling rig to our Orito Block and commenced a seven well drilling program. The first well, Orito-194, is drilled and waiting completion pending the arrival of a completion rig. We expect to have the well on production by the end of August. We are currently drilling the second well in the program, Orito-195.
Neiva, Upper Magdalena Basin, Colombia
During the last week of May, we mobilized a new, larger drilling rig to our Neiva Block and recommenced our development drilling program. We drilled two wells in the quarter and expect to drill an additional 10 wells by the end of 2011.
Block 126, Peru
Our initial three well exploration program on Block 126 is progressing. We have contracted a drilling rig and are currently building the well sites and logistics bases. We expect to begin drilling operations on the first well, La Colpa-2, at the start of the fourth quarter of 2011.
Blocks 114 and 131, Peru
Petrominerales holds a 30 percent working interest in blocks 114 and 131. On Block 131, the operator has initiated a 300 kilometre 2D seismic program. The next exploration phase requirement is to drill one exploration well on the Block by September 2013. To date, we have identified two drillable prospects on Block 131. On Block 114, the next exploration phase includes the acquisition of 260 kilometres of 2D seismic by May 2013. To date four drillable prospects and six leads have been identified on this Block. The operator is responsible for our share of the costs under the current seismic exploration phase, as well as our share of costs for the first exploration well on each block.
Block 161 and 141, Peru
Block 161, situated in east central Peru, is 1.2 million acres in size and is 80 percent owned by Petrominerales. Current commitments, to be completed by June 2012, include the acquisition of 350 kilometres of new 2D seismic data and an updated geological and geophysical report incorporating existing geological data and reprocessed seismic. Block 141, situated in southern Peru, is 1.3 million acres in size and is 80 percent owned by Petrominerales. Current commitments, to be completed by July 2012, include the acquisition, processing and interpretation of 300 kilometres of 2D seismic. Environmental Impact Assessment studies are currently underway in advance of the seismic programs.
NEW LICENSE AGREEMENT FOR THAI® TECHNOLOGY WITH PETROBANK
In the second quarter, Petrominerales and Archon Technologies Ltd. ("Archon"), a wholly-owned subsidiary of Petrobank Energy and Resources Ltd. ("Petrobank"), entered into a new Technology License and Royalty Agreement ("License Agreement"). The License Agreement gives Petrominerales the right to use Archon's patented THAI® in-situ combustion technology and other related technologies (the "Technologies") for the development of heavy oil resources in Colombia. In addition, Petrominerales has the exclusive right to sublicense the Technologies to third parties in Colombia for up to 10 years, provided certain contractual commitments are met, including commencing a pilot project within three years.
In exchange for the right to use and sublicense the THAI® technology in Colombia, Petrominerales has agreed to pay Archon a specified royalty based upon production, and has granted Archon the right to acquire a working interest in third party THAI® heavy oil joint ventures with Petrominerales. Archon, or an Archon affiliate, can elect to participate in a third party heavy oil joint venture for up to 25 percent of Petrominerales' share in the joint venture. For heavy oil projects that originate from Petrominerales' acreage, and do not include third party joint ventures, Petrominerales is solely obligated to pay a specified royalty rate to Archon.
The THAI® process (Toe-to-Heel-Air-Injection) has been developed by Petrobank and combines a horizontal production well with a vertical air injection well at the toe, and utilizes an in-situ combustion method to upgrade the oil in-situ. The THAI® process can result in substantially higher recovery factors than other thermal extraction methods while producing upgraded oil. The THAI® process also results in lower environmental impacts and a smaller surface footprint, when compared to conventional extraction methods, and is ideally suited for implementation in relatively remote locations.
OCENSA PIPELINE ACQUISITION
On July 22, 2011, we closed our acquisition of a five percent interest in the Ocensa pipeline. We expect to commence transporting our crude oil through the Ocensa pipeline starting September 1, providing us with strategic access to key transportation infrastructure. This acquisition is expected to lower our transportation costs compared to trucking for a significant portion of our Llanos Basin production, especially in the near term given the limited existing transportation infrastructure in Colombia. In addition, increasing the volume of our oil transported by pipeline reduces risks associated with trucking oil and our exposure to poor weather conditions and escalating trucking costs. The expansion of our infrastructure base through this acquisition enhances our marketing flexibility by improving our access to international crude oil markets and pricing, having the potential to further strengthen our netbacks. Along with our 9.65 percent interest in the Bicentenario pipeline this acquisition supports our long-term corporate objectives by securing strategic transportation capacity for our growing base of production, including our emerging heavy oil opportunities.
COLOMBIAN STOCK EXCHANGE LISTING
On July 22, 2011 we received the necessary approvals to list the Company's shares for trading on the Colombian Stock Exchange ("BVC"). Our shares commenced trading on the BVC on August 3, 2011, under the symbol PMGC. The listing on the BVC did not involve the issuance of any new shares but allows investors to acquire our outstanding shares locally in Colombia. Petrominerales believes it is important to facilitate investment in our shares by Colombians given our history of investment and involvement in the country and our strong, on-going commitment to Colombia.
OUTLOOK
The second half of our 2011 capital program will include drilling two large prospects in areas we have not drilled before, the Llanos Basin Foothills and Ucayali Basin in Peru. These prospects have the potential to significantly increase the Company's reserves and are in addition to our existing, active 2011 exploration program of up to 34 exploration wells, up to an additional 14 stratigraphic wells on our heavy oil acreage and a further 17 development wells on our Orito and Neiva Blocks. We will also continue to invest in our future with plans to acquire over 1,600 square kilometres of high quality 3D seismic to provide us further opportunities to grow our multi-year prospect inventory, which currently sits at over 100 drilling locations.
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