With the shale gas environmental assessment underway
in Québec, we shifted our short term strategy to
unconventional oil. Accelerating development of our
Antler asset will be our first priority, both through
organic growth and accretive acquisitions.
Although it will take longer than we expected,
commercializing our Utica shale gas discovery remains
our main long term priority. While the government
assesses the potential environmental impacts and
develops new regulations, we will focus on
communications with stakeholders to secure our social
license to operate.
· Interim regulations for shale gas development
announced by the Government of Québec
· Oil and gas exploration licenses extended during
strategic environmental assessment
· Completed divestiture of interest in Beaver River
Field to Transeuro Energy
· Cash flow from operations of $2.27 million and
production of 586 boe/d with improved oil weighting
leveraging higher prices during the quarter
· Balance sheet strength preserved with over $131
million in positive working capital and no debt
St. Lawrence Lowlands, Québec
Consistent with the BAPE recommendations, the
government of Québec commissioned a strategic
environmental assessment ("SEA") for shale gas
development in the second quarter. A multi-stakeholder
committee was appointed to conduct the SEA and new
regulations were enacted to govern operations during
The announcement of the SEA materially impacted our
timeline for commercial development of the Utica.
During this time, the government mandated limited
activities while it increases its understanding of the
industry and develops the appropriate regulations. We
were pleased to learn that the Ministry of Natural
Resources acknowledged this impact and extended the
term of our exploration licenses up to three years.
Environmental assessments are common for large scale
resource projects, including shale gas development in
other jurisdictions. While we appreciate the
importance of assessing the local impacts, we are
hopeful that, rather than re-creating the proverbial
wheel, the committee will leverage the growing body of
research that corroborates the established industry
practices to safely develop shale gas. This includes
the 1,000 page preliminary Draft Supplemental Generic
Environmental Impact Study recently published by the
Department of Environmental Conversation in New York
on the development of shale resources in the state. It
confirms the safety and benefits of shale gas
development, including that it is highly unlikely that
groundwater contamination would occur by fluids pumped
into a wellbore for hydraulic fracturing.
Dispelling the persistent myths about shale gas
development such as groundwater contamination remains
an important part of our public relations efforts in
Québec. The reports emerging from a wide variety of
sources continue to validate our position. We are
optimistic that these will allow us to refocus the
debate on the real issues like water handling and
cementing practices that are common to all drilling
operations and unrelated to hydraulic fracturing.
Accelerating activity at Antler is key to our strategy
of diversifying into unconventional light oil during
the environmental assessment in Québec.
Our planned development of this light oil resource
will benefit from our learning curve over the last two
years. Refinements to our drilling and completion
programs, improved production practices and operating
efficiencies have contributed to increased recoveries
and lower operating costs.
Notwithstanding the excellent fiscal terms in
Saskatchewan that enhance these economics, returns are
challenged by weather and equipment availability.
Heavy rainfall this spring coupled with high snow pack
resulted in record flooding in southern Saskatchewan
that submerged well sites, access roads and highways.
The province, Canada's second largest oil producer,
reported that approximately 20,000 to 30,000 barrels
of oil production was shut-in as a result of this
flooding. We expect this will further constrain
available completion equipment during a very short
summer operating season.
Through a combination of geography and design, our
existing production was largely unaffected by the
inclement weather. The majority of our horizontal
wells are pipeline connected to our main battery
eliminating the trucking from well sites that were
flooded. Our main battery is located on drier ground
and proximate to open highways allowing trucking of
the produced oil to the sales terminal.
As weather conditions improve, we are resuming field
operations. Our plans for the remainder of this year
are to drill up to 10 (5.0 net) wells. As equipment
availability permits, we will look to a second rig to
achieve this plan. With an inventory of wells to be
drilled and awaiting completion, we anticipate
contracting frac equipment for a definitive period.
This will allow us to reduce the lag between drilling
and completion from six months to four months or less.
Subject to these constraints, we are targeting a
corporate exit production rate of 750 boe/d for 2011.
Early in the third quarter, we expanded our presence
in the area through an acquisition of producing assets
and undeveloped land for $13.25 million. The
acquisition of approximately 100 bbl/d of operated
production added a number of infill and step out
locations. We continue to look for assets that will
complement our existing production at Antler.
Operational and Financial
The weather related delays and equipment shortages at
Antler lowered our production volumes as we were
unable to complete wells as planned. With the
disposition of the Beaver River Field, we also lost 70
boe/d for the last month of the quarter. Although
volumes were lower, the higher oil weighting realized
higher prices and improved our results.
Cash flow from operations for the quarter was $2.27
million with average daily production of 586 boe/d and
an operating netback of $58.75/boe. Our operating
margins should improve over the remainder of the year
with the elimination of the fixed operating costs and
relatively minimal production volumes associated with
the Beaver River Field.
Over the remainder of this year and next,
unconventional oil will be our main focus.
We will continue to actively develop Antler. This will
include organic growth as well as accretive
acquisitions. Our goal is to create a core area with a
value in excess of our current market capitalization.
Another goal is to create shareholder value through
scalable early stage unconventional projects targeting
light oil. We have the in-house expertise and balance
sheet strength to capitalize on the right
opportunities when they arise.
Although the timeline has been extended, we remain
committed to the goal of commercializing our Utica
shale discovery. We have been very encouraged by the
growing body of evidence that endorses that shale gas
can be developed safely. We believe communicating this
and the benefits to local stakeholders will be
essential to securing our social license to operate.
President and Chief Executive Officer